O V 









>°''*^ 



'0M 



cSo 



I ' « 



c • 






^^^^v^ 



B-O" ^V 



■ \w/ %/W;/ vlf>** 
&V/ '^'V„,^ >^X,/ -^ 



.T,--^o' V*^''<«'*^" 'V'^'^''/ .. V^'- 






^'=u, 






? Mix . ^11^ « av vv o^^IOj^ * 

















%t.. 



0' 




o > 








^^^^ 





^^" 



% # 

V*^^ 










-A^ ^ * e « S ' V V 




., _*^„ c** ' 












"T. 



^v^d^ 



\///L o ^»v «i^ 



^^^ 







r^ '^^J^f^-y \^^^ /-^^-^^ ^.. .W^ 
























n V w o ^ "^ 

♦ j^?^^ c,*^ O 



^^^^ 



<^ 



,-?-' 




■«y n*' 



'^^' 

**'\ 




v<^^ 












.V 




V 



V?^. 











odern Business 



A SERIES OF EIGHTEEN TEXTS, ESPECIALLY PREPARED 

FOR THE ALEXANDER HAMILTON INSTITUTE COURSE IN 

ACCOUNTS, FINANCE AND MANAGEMENT 

EDITED BY 

JOSEPH FRENCH JOHNSON 

DEAN, NEW YORK UNIVERSITY SCHOOL OF COMMERCE, ACCOUNTS AND FINANCE 

Titles Authors 

ECONOMICS OF BUSINESS .... Edward Sherwood Meade 

Ujiiversily of Pennsylvania 

ORGANIZATION AND MANAGEMENT Lee Galloway 

New York University 

SELLING . R. S. Butler 

University of Wisconsin 

CREDITS Lee Galloway 

New York University 

TRAFFIC Philip B. Kennedy 

New York University 

ADVERTISING Lee Galloway 

New York University 

BUSINESS CORRESPONDENCE . . . G. B. Hotchkiss 

New York University 

ACCOUNTING PRACTICE Leo Greendlinger 

New York University 

CORPORATION FINANCE William H. Lough 

New York University 

MONEY AND BANKING Earl Dean Howard 

N orthweslern University 

BANKING PRACTICE H. M. Jefferson 

New York University 

FOREIGN EXCHANGE ...... Franklin Escher 

New York University 

I Thomas Conway 
INVESTMENT AND SPECULATION A ^LBERrW 1x^00?''""' 

I New York University 

INSURANCE Edward R. Haedx 

New York University 

REAL ESTATE . ' Walter Lindner 

New York University 

AUDITING Seymour Walton 

Northwestern University 

COST ACCOUNTS Stephen W. Oilman 

University of Wisconsin 

COMMERCIAL LAW Charles W. Gerstenberg 

New York University 

ALEXANDER HAMILTON INSTITUTE 
NEW YORK 




A PRACTICAL EXPOSITION OF THE 
SCIENCE OF BUSINESS, WITH ILLUS- 
TRATIONS FROM ACTUAL EXPERIENCE 

BY 

EDWARD SHERWOOD MEADE 

PROFESSOR OF FINANCE IN THE WHARTON SCHOOL 
OF FINANCE AND COMMERCE, UNIVERSITY OF PENN- 
SYLVANIA; AUTHOR OF "TRUST FINANCE," "THE 
STORY OF GOLD," ETC. 



Modern Business 
Volume I 



ALEXANDER HAMILTON INSTITUTE 
NEW YORK 



Wonograpri. 



5 

,(VV5 



COPTRIGHT, 1909, BY 

ALEXANDER HAMILTON INSTITUTE 

Copyright, 1910, by 
ALEXANDER HAMILTON INSTITUTE 

Copyright, 1911, by 
ALEXANDER HAMILTON INSTITUTE 

COPYBIGHT, 1912, BY 

ALEXANDER HAMILTON INSTITUTE 

Copyright, 1913, by 
ALEXANDER HAMILTON TN.STITUTE 



^ 



EDITOR'S PREFACE 

"Modern Business" is a pioneer work in its field. Its 
authors, who are university specialists, have aimed in 
these twelve volumes to apply scientific methods in the 
discussion of various phases of business and at the same 
time to be so practical and clear, and so copious with 
illustrations, that their ideas shall be readily understood 
by every man of ordinary intelligence. They should ap- 
peal to the mature man already engaged in business, for 
they cover many subjects with which he cannot be at 
first hand familiar; and to the young man looking for- 
ward to a business career, for they will give him a help- 
ful grasp of underlying principles and a most useful 
knowledge of modern practice. 

The volumes of "Modern Business," it should be 
clearly understood, are not designed to cover thoroughly 
and in detail every point that ought to be included in a 
study of present-day business; they constitute but one 
feature of the comprehensive course of reading in 
business as a part of which these volumes are here pre- 
sented. The function of the text-books in this course is 
to present clearly the basic principles of each subject dis- 
cussed. Applications of problems, concrete questions, 
technical details, are largely ^eft to be treated in other 
features of the course. We may say, however, that the 
books alone contain — for the man who studies them 
properly — the fundamentals of a university education 
in the science and art of business. In this brief intro- 
duction I cannot give space to a full treatment of all 



ii ECONOMICS 

the features of the complete course, and I shall there- 
fore confine myself to a brief review of the char- 
acteristics and purposes of the " Modern Business " 
series. 

It is only during the last few decades that business 
has been recognized as a science worthy the attention of 
specialists. Many doctrinaire political economies have 
been written, but these in the main have sought to ex- 
plain, not the actual phenomena of the business world, 
but the phenomena of an imaginary, hypothetical world 
in which all men were supposed to be actuated solely by 
economic or material considerations. Such classic writ- 
ers as Adam Smith, David Ricardo, and John Stuart 
Mill performed a great service for humanity, for they 
called attention to certain truths which must always pre- 
vail so long as human nature is unchanged; but their 
service lies largely in the field of pure economics rather 
than that of applied or practical economics. Our great 
economists did not seek to explain the actual phenomena 
of every-day life. Their interests lay, not in the sci- 
ence of business, but in social or national economy. As 
a result their works, although possessing great scientific 
value, seem far removed from the affairs which inter- 
est the practical business man. 

The volumes of "Modern Business," on the other 
hand, are directly concerned with the problems which the 
business man is called upon daily to solve. They treat 
specifically of the science and art of business. The 
problems involved in the more general science of so- 
called political or national economy they discuss only 
in so far as light is thus thrown upon actual transac- 
tions. These twelve volumes, from a scientific point of 
view, all belong in the same field, each discussing a 
separate set of business phenomena. Could their con- 



EDITOR'S PREFACE iii 

tents be condensed into a single volume, it would be a 
complete syllabus or outline of the science of business 
in all its phases and practical applications. It must 
not be supposed, however, that the writers ignore the 
teachings of the older economists. On the contrary, 
those teachings, in so far as they are applicable to-day, 
are here given emphasis and fresh illustration. 

While the twelve volumes may be regarded as a unit, 
nevertheless each volume is complete in itself and may 
be studied independently of the rest. The volume on 
"Economics," for example, is a general introduction to 
the course and touches upon almost all of the questions 
raised in the other volumes. The volumes on "Corpora- 
tion Finance" and "Investment and Speculation" treat 
of kindred subjects, but from different points of view. 
The same may be said of the volumes on "Money and 
Banking" and "Banking Practice and Foreign Ex- 
change." The two volumes on accounting could not 
be read to advantage by a man ignorant of the sub- 
ject unless he began with Volume V, entitled "Ac- 
counting in Theory and Practice," in which the ele- 
ments of the subject are first given. The volumes 
which treat of Salesmanship, Advertising, Insurance, 
Real Estate and Commercial Law can be understood 
by any reader without reference to other volumes. 

In order that each volume might possess independent 
unity and be complete in itself, as the reader will dis- 
cover, certain important topics are discussed in two or 
more volumes. For example, the modern methods of 
speculation in stocks are explained in "Corporation Fi- 
nance" and again, but in greater detail, in "Investment 
and Speculation," and in the volume on "Economics" 
certain types of business organization are mentioned 
which the reader will find described more fully in Vol- 



iv ECONOMICS 

ume II. The editor permitted imi)ortant subjects to 
be covered twice because he deemed it important that 
each book should be complete in itself, and desirable 
that the reader should approach certain questions from 
two different viewpoints. 

Within the last few years many of the leading uni- 
versities of the United States, including Harvard, New 
York University, University of Wisconsin, University 
of Michigan, University of Illinois and the University 
of Pennsylvania, have established schools of commerce 
in which they aim to give young men a thorough train- 
ing in the principles of business. Their work is based 
on the belief that through a study of commercial meth- 
ods and economic forces a young man may get valuable 
mental discipline and at the same time acquire the tech- 
nical knowledge and the habits that make for efficiency 
and success in business. These schools of commerce 
have been the outgrowth of a popular demand for in- 
struction of the sort they give, and the large number of 
students they have enrolled is evidence that the people 
of the United States realize the importance of intellec- 
tual training as a preparation for business careers. It 
has long been acknowledged that a man who chooses the 
career of a physician, of a civil or mechanical engineer, 
of an architect, or of a dentist, must prepare himself 
for his work by devoting several years to study in the 
schools and universities. Now it is known that the 
young man who chooses a career as a banker, or certi- 
fied public accountant, or stock-broker, or bond-dealer, 
or fire or life insurance agent, or journalist, or real es- 
tate dealer, or manufacturer, ought in the beginning to 
learn by study all that is possible from the experience of 
others. In other words, many of our business careers 
have become professional in their character, requiring 



EDITOR'S PREFACE ^ 

a training of the intellect quite as much as the older pro- 
fessions. It is for this purpose that our schools of com- 
merce have been established and are now enrolling 
large numbers of students. 

But not all men can attend these schools of com- 
merce. Many a young man is earning a living in his 
native town at a distance from a university and without 
the means to go to it. Furthermore, there are thou- 
sands of older men — including many of high ability — in 
the United States who realize the deficiencies of their 
early training and regret that they have no opportunity 
to get the education which they could not or did not get 
in their youth. Most ambitious men of this kind have 
families to support and are tied down to a particular 
location. It is for men of this sort that are distant 
from universities, or whose daily employment prevents 
their attendance upon university schools, that these vol- 
umes have been prepared. The authors, all of them 
experienced university teachers, have aimed, above all 
things, at comprehensiveness and clearness, in order 
that no reader of intelligence might be puzzled. They 
have aimed also to develop each subject in such 
logical fashion and to illustrate all points so clearly that 
every reader who conscientiously follows directions and 
does the work outlined for him shall not fail to ar- 
rive at an intelligent understanding of each of the sub- 
jects. 

The volume on "Economics" the reader will find is 
the keystone of the business arch. A man who does not 
understand the science of business can never have a thor- 
ough and comprehensive grasp of any single business. 
This subject underlies all business just as mathematics 
underlies all engineering vocations. It is the founda- 
tion subject and should first of all be studied. Its pur- 



vl ECONOMICS 

pose is to bring before the reader a clear idea of the 
business problems which economists have sought to solve 
and to make him able to read the scientific literature of 
the subject intelligently. It explains the laws govern- 
ing the price of goods, the wages and salaries of 
employes, the profits or net earnings of employers, in- 
cluding both individuals and corporations, the rate of in- 
terest, and the rent of buildings and land. It discusses 
in comprehensive style the perplexing problems raised 
by trade unions, by the capitalistic combinations called 
trusts, by natural monopolies, by the tariff, and by the 
state regulation of railways. In fact, in this first vol- 
ume the student will find that light is thrown upon most 
of the questions raised in the succeeding volumes. 

Two volumes are devoted to accounting. Volume V 
on "Accounting in Theory and Practice" elucidates the 
principles of the subject and gives to tlie reader the 
guidance he needs in training himself for the solution of 
difficult practical problems. Of particular interest is 
the discussion of bookkeeping principles, of partnership 
and corporation forms and accounts, and of accounting 
for intangible expenditures and assets. 

Volume XI is in part devoted to the important work 
of the auditor, stating the principles which determine 
the correctness and completeness of an audit and giving 
concrete illustrations of the proper method to pursue 
in the audit of different businesses. The important sub- 
ject of costs, which is treated in the other half of the 
volume, cannot be studied too carefully by anyone who 
is even remotely interested in manufacturing — and this 
includes bankers, wholesalers, accountants, and many 
others. 

V^hile these two volumes on accounting contain 
much more information about accounts than is pos- 
sessed bv the average business man in the United States, 



EDITOR'S PREFACE vii 

nevertheless every business man who is trying to in- 
crease his efficiency and earning power ought to im- 
prove every opportunity of getting a grasp of the whole 
subject. If he engages in the manufacturing business, 
his knowledge of cost accounts will be a telhng advan- 
tage. If he is a banker, his understanding of the prin- 
ciples and proper methods of auditing and of accounts 
in general will promote his interests. In fact, in every 
field of business the man who understands the science of 
accounts and can solve its most difficult problems, has a 
great advantage over one who has merely a knowledge 
of routine bookkeeping. 

The four volumes which treat of finance cover both 
the theoretical and the practical phases of the subject. 
The volume on "Corporation Finance" describes the 
sources from which corporations obtain their funds and 
the methods which they employ. This volume is prac- 
tical and descriptive and can be understood by a reader 
who has had no previous training in finance. 

The volume on "Money and Banking" expounds the 
fundamental principles underlying all financial opera- 
tions. "Banking Practice and Foreign Exchange" is 
especially intended for bankers. ,The volume on "In- 
vestment and Speculation" is designed for the especial 
benefit of men employed in stock and bond houses. It 
describes the methods of the stock exchange and ex- 
plains the transactions and processes of that great 
financial market known as Wall Street. A student who 
faithfully masters the contents of these four volumes 
on finance, even though he were born and bred in 
the country, would enter Wall Street with a much 
clearer idea of its possibilities and its dangers than is 
possessed by many a man who has been employed for 
years in that great market. 



vm ECONOMICS 

The volumes treating of "Organization and Manage- 
ment," "Salesmanship," "Advertising," "Selling, Cred- 
its and Traffic," should prove of great practical help 
both to executives who are hourly handling problems in 
these fields and for young men who are trying to get a 
clear understanding of the basic business processes. 
The volume on "Organization and JNIanagement" lays 
down the fundamental principles underlying the work 
of the so-called efficiency engineer, and describes 
methods which have proved most success fid in the con- 
duct of modern business. In the fields of selling, ad- 
vertising and credits new business professions are rap- 
idly being developed, and the effort has been made in 
these volumes to give the reader scientific and helpful 
guidance. No reader should neglect the chapters on 
"Business Correspondence." 

The volume on " Commercial Law," primarily de- 
signed to keep business men from making unnecessary 
blunders, should prove especially useful to employes of 
banking, trust, surety and insurance companies, and to 
men preparing for the accounting profession. 

The editor in conclusion desires to say that he has left 
the authors complete liberty in the expression of opin- 
ions and conclusions. Each author is alone responsible 
for the views he expresses. In matters of opinion or 
of choice between opposing theories these volumes are 
not in complete harmony, and no volumes of the sort 
could be unless they were the product of a single pen. 

In order that the reader may become familiar with 
other views, especially those of the Classical School, 
the editor has inserted in this volume citations from the 
works of other economists. 

Joseph French Johnson. 
New York University. 



AUTHOR'S PREFACE 

In a Democracy a knowledge of economics should be 
for the many, not the few. The wealth and prosperity 
of the nation are prerequisite to the wealth and happi- 
ness of the people. A high civilization is possible only 
with an intelligent development of a nation's resources, 
and a general diffusion of the resulting wealth. Any 
endeavor, therefore, to put into practical and popular 
form a knowledge of the production and distribution 
of wealth is a move in this direction. 

The book presupposes no previous knowledge of 
economics other than that possessed by any intelligent 
person who reads the daily newspapers and keeps 
his eyes open. A formal arrangement of the volume 
into divisions and subdivisions, as well as discussions 
of economic theory, are conspicuous by their absence. 
The attempt has rather been to give a description of 
the business world to-day couched in as few technical 
terms as possible. The terms "rent" and "interest," 
for example, are used as they are in the average busi- 
ness man's vocabulary, and not in the more theoretic 
sense used by many economic writers. The illustra- 
tions are taken from conditions found in the every- 
day business world. Thus, for example, the discussion 
of an apprentice system centers in a description of the 
system now in operation in the Baldwin Locomotive 
Works. Pursuant to this same aim, the author has 
gone rather extensively into the important fields of 
Money and Credit and Corporate Organization. 



X ECONOMICS 

The concluding chapters of the book deal with prob- 
lems of to-day. As great as our past development has 
been and as wondei'ful as present prosperity is, few 
thinking men will contend that our civilization is as far 
advanced as we have a right to demand. Wealth and 
prosperity are realities, but so also are child labor, 
unemployment and congestion. These are maladjust- 
ments which an intelligent application of social and' 
economic principles can remedy. Then, again, as condi- 
tions change and as our industrial institutions grow, new 
problems must of necessity arise. This is true of all 
dynamic nations and is the price of progress. If they 
are to be solved aright, the people must have a true 
knowledge of their nature. A discussion of these prob- 
lems in a volume of this kind is not indicative of pes- 
simism, but merely of an optimism which is not afraid to 
look the facts in the face. 

Edward Sherwood Meade. 

University of Pennsylvania. 



TABLE OF CONTENTS 



PART I: PRODUCTION. 



CHAPTER I. 
PROPERTY. 

SECTION PAGP 

1. Economics Defined . = . . . » . . . . 1 

2. Private Property . . „ „ , „ . . , . . 2 

3. Right of Private Property ........ 4 

4. Limitation of the Right of Private Property by Taxation 6 

5. Limitation of the Right of Private Property by Public 

Improvement ............ 6 

6. Effects of Private Property upon Individuals ... 7 



CHAPTER 11. 
PRODUCTION. 

7. Production and Producer Defined o =, . . . . 13 

8. Forms of Production ,. ., . . 14 

9. Time Utilities 16 

10. Possession Utilities l(j 

11. Agents of Production . . . „ . , . :., ic . 17 

CHAPTER IIL 
NATURAL AGENTS. 

12. Free Goods of Nature and Their Transformation , . 20 

13. Changes in Form and Place Required by Production . 21 

14. Latent Powers of Nature 22 

15. Importance of Properties of Matter in Production . . 24 

xi 



xll ECONOMICS 

CHAPTER IV. 
LABOR. 

;ection page 

16. Labor Defined 28 

17. Analysis of Labor 28 

18. Qualities that Determine Efficiency 29 

19- Physical Efficiency 29 

20. Importance of Safe and Sanitary Siirroundingij . . . 31 

21. Views of a Work's Manager on Industrial Betterment . 32 

22. Factory Legislation 34 

23. Extra-business Relations Between Employer and Em- 

ploye 37 

CHAPTER V. 
TRAINING OF WORKERS. 

24. Mental Efficiency of Labor 39 

25. Money Value of Education 41 

26. Place of Mind in Production 43 

27. Importance of Training for Business ..... 43 

28. Demand for University Trained Men in Business . . 45 

29. Effect of Machine Industry upon Labor 46 

30. Apprentice System of Baldwin Locomotive Works . . 47 

31. Training Shop Superintendents 49 

32. Importance of Moral Efficiency ....... 50 

CHAPTER VL 
WOMAN AND CHILD LABOR. 

33. Labor of Women and Children ...... 52 

34. Moral and Physical E fleets of Child Labor . . . , 53 

35. Indirect Effects of Child Labor . 54 

36. Child Labor Inefficient and Uneconomical .... 55 

37. Women in Industry ... 56 

38. Women's Wages Lower Than Men's 57 

39- Women in Factory Industry . 58 

40. Tlie Problem of Woman in Industry — Arguments 

Against . 60 

41. Arguments in Favor of Women's Labor 61 



CONTENTS xiii 

CHAPTER VII. 
CAPITAL. 

' PAGE 

PrimitiTe Man Compared with Civilized Man ... 63 

Capital Defined 64 

Service of Capital in Production . . . . , , .65 

Capitalistic Production is Indirect 67 

Illustrations of Indirect Methods in Production — Fish- 
ing . 69 

Illustration of Capitalistic Production — Increase of 

Flour Trade to China 69 

Saving Defined . 71 

Illustration of Saving 71 

Necessity of Saving ; ... 72 

Maintenance of Plant Saving 72 

Illustrations of Maintenance . . . . . . . .74 

Meaning of the Consumption of Capital ..... 76 

Productive and Unproductive Consumption .... 77 

What Constitutes Economic Usefulness ..... 80 

CHAPTER VIII. 
DIVISION OF LABOR. 

Meaning of the Division of Labor . . . . . .81 

Illustration of the Division of Labor by the Operations 

of a Woolen Mill 81 

Advantages of Division of Labor ....... 84 

Increased Efiiciency Through Division of Labor ... 84 

Increased Specialization 88 

Illustration from the Meat-packing Industry . . . -91 
Economies Effected by Division of Labor .... 92 
Narrowing Effect of Specialization and its Remedy . 94 
Division of Labor and Specialization of Plant ... 95 
Illustrations of Economies of Specialization .... 95 
To Show the Difference in Cost Where Different Ma- 
chinery and Different Processes are Used . . . .96 
Illustration from the Manufacture of Incandescent 

Burners 98 

Second Result — Continuous Processes 98 



xiv ECONOMICS 

CHAPTER IX. 
LOCATION OF INDUSTRIES. 

SECTION PAGE 

69. Location of Extractive Industries 100 

70. The Influence of Climate Upon the Location of Indus- 

tries 101 

71. Perishability of Materials an Important Influence on Lo- 

cation 102 

72. Supply of Fuel or Water Power an Important Bearing 

on Location 102 

73. Industries Utilizing Waste Products . . . . . .103 

74. Residence of Consumer Decisive Factor in Location of 

Some Industries 103 

75. Specialization of Labor a Determining Factor of Some 

Industries 104 

76. Cheapness of Labor a Decisive Influence . . ... .104 

77. Changes in the Location of Industry 105 

78. Pittsburg as an Illustration IO6 

79. Proximity to Supplies of Coking Coal 107 



CHAPTER X. 
LARGE-SCALE PRODUCTION. 

80. Large-scale Production Defined 109 

81. Centralization of Production 110 

82. Economies of Large-scale Production 112 

83. Other Advantages of Large-scale Production . . .113 

84. Essential Dift'erences Between Large and Small Con- 

cerns 114 

85. Broadening the Scope of Business Operations . . .114 

86. Causes of the Development of Large-scale Production . 115 



CONTENTS XV 



PART II: EXCHANGE. 

CHAPTER I. 

MEDIA OF EXCHANGE. 

SECTION PAGE 

87. Necessity for Exchange . . . . . . , , .120 

Two Forms of Exchange . . . . . . . . .121 

Medium of Exchange 122 

Commodities Used as Media of Exchange , . . .123 

Characteristics of a Medimn of Exchange •. . . .123 



CHAPTER II. 
MONEY SYSTEM OF THE UNITED STATES. 

Unit of Value 125 

Kinds of American Money . .125 

Parity of Paper Money and Coin . . . . . . .126 

Government Guarantees 127 

Bimetallism 128 

Abandonment of the Double Standard 129 

Inconvertible Paper . .130 

Paper Money Issues During the Civil War . . . .132 



CHAPTER III. 
CREDIT. 

Credit Defined 133 

Functions of a Bank 134 

Checks as a Medium of Exchange 135 

Clearing House 137 

Deposit Currency is a Check Currency 139 

Limitations of Bank Credit 140 

Extent to Which " Promises to Pay " are Used . . .140 

Basis of Bank Credit , , . , . , . . , . 14<l 



xvl ECONOMICS 

CHAPTER IV. 
BANKING SYSTEMS. 

SECTION PAGE 

108. Organization of National Banks in the United States . 142 

109. Powers of National Banks . 142 

110. National Bank Reserves . . . . . . , . ,144 

111. Bank of England o .... 145 

112. Bank of France ........... 145 

113. Imperial Bank of Germany 146 

114. Protection of Bank Note Issues 146 

115. Asset Currency ..... 147 



CHAPTER V. 
PRICES. 

116. How Value is Determined .149 

117. Value of Commodities Expressed Only in Money . .152 

118. Prices and Profits ........... 154 

119. Making of Prices , . . 159 

120. Factors Which Influence Price I60 

121. Factors Influencing Demand , . .162 

122. Method of Operation of These Factors . . . . .163 

123. Utility to Consumer a Factor in Determining Price . .165 

124. Price Fluctuations and Their Cause 167 



CHAPTER VI. 
INTERNATIONAL EXCHANGE. 

125. International Payments . . . . . . . . .169 

126. Domestic Exchange 170 

127- Similar Method Employed in the International Ex- 
changes 171 

128. Essential Elements of the Transaction 173 

129. International Exchange an Off'setting of Credits . . .173 

130. Other Sources of Bills of Exchange 17* 

131. Large Surplus of Commodities Must be Exported . .175 

132. International Income Account . . . . . . • .176 



CONTENTS xvli 



PART III: DISTRIBUTION. 

CHAPTER I. 
FORMS OF OWNERSHIP. 

SECTION PAGE 

Four Interests in Every Business 182 

Entrepreneur „ .... 182 

Three Forms of Entrepreneur . . „ . . . , .183 

Partnership . / . . . .183 

Kinds of Partners .184 

Obligations of Partners . .185 

Direction and Dissolution of Partnerships . . . .186 

Corporation 187 

Advantages of the Corporation . . . . . . .187 

Limited Liability . . . 188 

Industrial Income — Distribution of . . , . . .189 
Claimants to Income ipi 

CHAPTER II. 

CLASSES OF M^ORKERS. 

Organizer 193 

Knowledge Possessed by the Organizer . . . . .194 
Industrial Importance of the Organizer . . . . .194 
How the Supply of Organizers Can be Increased . .195 

Manager 196 

Training of Managers - . . , .198 

Boss 199 

Classes of Labor in Relation to Wages ..... 200 
Unskilled Labor 201 

CHAPTER III. 
CAUSES AFFECTING RATE OF WAGES. 

154. Real and Money Wages 203 

155. Illustration of Distinction Between Real and Money 

Wages 203 



xviii ECONOMICS 

SECTION PAGE 

156. Distinction Between Fees and Wages 204 

157. How Rates of Wages are Determined 205 

158. Demand for Labor 206 

159. Other Causes Affecting the Demand for Labor . . . 207 

160. The Supply of Labor 208 

161. Immigration 208 

162. Conditions of Employment as Affecting the Supply of 

Labor 209 

i63. Supply of Labor in Each Class 210 

164. Qualifications for Various Positions 211 

165. Railway Traffic Manager 212 

166. Railway President 212 

CHAPTER IV. 
SYSTEMS OF PAYMENT. 

167. Payment of Wages According to Efficiency . . . .215 

168. Loss of Time Through Idleness 217 

169. Systems of Wage Payment Calculated to Increase Effi- 

ciency 218 

170. Profit-sharing Unfair to Employer 219 

171. Piece Wages 220 

172. Objections to Piece Work 221 

173. Premium System of Wage Payment 222 

174. Summary of the Advantages of the Premium System . 223 

175. Advantages to Employes From Introduction of Improved 

Machinery 224 

176. Hazards of Different Occupations 226 

177. Illustration from Manufacture of Bleaching Powder . 227 

178. Supply of Labor Depends on Chances of Success , . 229 

179. Sole or Partial Dependence of Labor on Wages Re- 

ceived 230 

CHAPTER V. 
LABOR ORGANIZATIONS. 

180. The Trade Union and the Supply of Labor .... 232 

181. Form of Organization of Union 233 



CONTENTS xlx 

SECTION PAGE 

182. The United Mine Workers of America 234 

183. The National Convention 235 

184. Objects of the Trade Union 236 

185. The Trade Agreement 236 

186. Contests Between Employer and Employe .... 239 

187. The Strike 240 

188. Picketing in Strikes 241 

189. Ostracism 242 

190. Illustrations of Ostracism 242 

191. The Strike an Effective Weapon 244 

192. Situation of the Employer Under Competition . . . 244 

193. Strong Position of the Union in Negotiating with Com- 

petitors ., . . 245 

194. Common Action Among Employers is Impossible Under 

Competition 247 

Collective Bargaining Better Than the Strike . . . 248 

Other Activities of Trades Unions 249 

Employer's Attitude Toward the Closed Shop . . . 249 

Unreasonable Demands of Trades Unions .... 250 

Opposition to Labor-saving Machinery 251 

Most Promising Field for Trade Union Development . 252 



CHAPTER VI. 
RENT. 

Rent Defined . 254 

Forms of Rent Paj^ments 255 

How the Amount of Rent is Determined . . . . .256 

Agricultural Rents 257 

Influence of Price on Rent 260 

Location in Relation to Rent . .261 

Rent of Mines . ^61 

Ground Rents 262 

Location of Retail Stores 263 

Other Factors Determining the Value of Locations . . 264 

Building Rentals . 265 

Economic Rent ............ 266 



XX ECONOMICS 

CHAPTER VII 
INTEREST. 

SECTION PAGE 

213. Interest Universal » 269 

214. Why Interest is Paid 269 

215. Interest Paid for Money 270 

216. Interest and Discount Identical 271 

217. Forms of Security for Loans 271 

218. The Mortgage 272 

219. Collateral Security 273 

220. Classes of Loans .......... 274- 

221. Short Time Commercial Loans 274 

222. Long Time Loans 275 

223. Public Bonds 277 

224. The Investor 277 

225. Rates of Interest on Loans 278 

226. Causes Determining the Rate of Interest . - . .279 

227. Basis of Classification of Loans 282 

228. Changes in Interest Rates . 283 

229. Limitations to the Expansion of Bank Credit . . . 285 



CHAPTER VIIL 
PROFITS. 

230. How Profits are Calculated 286 

231. The Farmer's Profits 286 

232. Manufacturing and Railroad Profits 288 

233. Profits Difficult to Make ......... 288 

234. Effect of High Prices 289 

235. How Profits are Made 290 

236. Appreciation of Property 291 

237. Superior Ability as a Source of Profits 291 

238. Advantages of the Carnegie Steel Company .... 292 
239- Sui^erior Equipment in Machinery and Men .... 293 

240. Extraordinary Demand for the Product in Source of 

Profit 295 

241. Speculation as a Source of Profits 296 



CONTENTS xxi 

SECTION PAGE 

242. Monopoly as a Source of Profits ...,,.. 298 

243. Monopoly of Large Industries 299 

244. Franchises and Patents ......... 300 

245. Monopoly of Quality 301 

CHAPTER IX. 
TAXATION. 

Functions of Government o . . 303 

Taxes Defined 304 

Basis of Taxation . . . 305 

Maxims of Taxation 305 

Forms of Taxation . „ . . 306 

Advantages of Direct Taxation ....... 306 

Advantages of Indirect Taxation 307 

General Property Tax 307 

Income Tax 309 

Single Tax on Land Values , .310 

Proposition of the Single Tax . .311 

Fiscal Objections to the Single Tax . . . . .312 

Economic Objections to the Single Tax . . . .313 

Inheritance Tax 314 

Excise Duties . . „ . . .317 

Customs 317 

Ideal Systems of Taxation .318 



PART IV: ECONOMIC PROBLEMS 

CHAPTER L 
RAILROAD PROBLEM. 

Transportation a Factor in our National Economic Life 320 

Development of the Railroad System 320 

Railroad a Form of Monopoly 321 

The Railroad is Quasi-public in Nature 322 

Problem of Discrimination . 323 



ECONOMICS 



268. History of Railroad Legislation . 

269. Interstate Commerce Act of 1887 • 

270. Elkins Law of 1903 

271. Hepburn Act of 1906 

272. Public Regulation Versus Public Ownership 



PAGE 

325 
326 
327 
328 
328 



CHAPTER 11. 
TARIFF PROBLEM. 

273. Basis of International Trade . 

27'i. Protective Tariff .... 

275. Operation of a Protective Tariff 

276. Theory of Protection . 

277. Evils of " Dumping "... 

278. " Dumping " a Present Problem 
279^ Why " Dumping " is Possible . 

280. Production on a Large Scale Economical . 

281. United States Steel Corporation and " Dumping 

282. Tariff wall prevents " Dumping " . . . , 

283. Foreign Importations not Always an Evil . 

284. Need for Reciprocity 

285. What Kind of a Tariff System Shall we Adopt.? . 



332 
334. 
334 
335 
338 
339 
340 
341 
342 
343 
344 
346 
347 



CHAPTER IIL 
TRUST PROBLEM. 

286. Beginning of the Trust Movement . . . . . . 349 

287. Rapid Growth in 1898 . .350 

288. Relation of Prosperity to the Trust Movement . , . 352 

289. Promoter and Trust Movement ....... 353 

290. Evolution of the Trust 356 

291. Weakness of the Pool 356 

292. Original Organization of the Trust 357 

293. Trusts Declared Illegal 359 

294. Holding Company 360 

259. Success of the Holding Company . , , . . . . 361 



CONTENTS xxlii 

' PAGE 

Corporation Law of New Jersey 362 

Legality of the Holding Company 363 

Economics of Combination 365 

Unfair Advantage of the Trusts 366 

Discriminating Prices 367 

Unfair Contracts With Retailers 369 

Further Causes of Popular Hostility Toward the Trusts 370 

Stock Manipulation 372 

History of the Trust Legislation . 374 

Sherman Anti-Trust Act . . .374 

Failure of the Sherman Act 375 

Bureau of Corporations 377 

Future of the Trust Problem 377 



CHAPTER IV. 
PROBLEM OF MONOPOLY. 

Nature of Monopoly 379 

Monopoly a Universal Phenomenon 380 

Monopoly Accompanies Progress 381 

One Monopoly Feeds on Another . . . . ." . . 383 
Some Would Apportion the Social Surplus by Lav, . .384 

Objections to Government Regulation of Prices . . . 385 

Interest of Consumers in Prices 385 

The Consumer May Also be a Stockholder .... 387 
The Problem is to Universalize Monopoly Power . .388 

Power of Substitution 389 

Power of Substitution and the Price of Oil .... 390 
Social Welfare May Occasionally Compel Government 

Regulation of Prices 392 



CHAPTER V 
'S^OCIALISM. 

32L Social Unrest . 395 

322. Exploitation 396 

323. No Remedy Furnished by Individualism 397 



xxiv ECONOMICS 

SECTION PAGE 

324. Wastefulness of Individualism 397 

3^5. Competition Essentially Evil 398 

326. Socialistic Program 398 

327. Socialism and the Single Tax 400 

328. How is Socialism to be Instituted 400 

329. Reconciliation Between Socialism and Individualism . 403 

330. Socialists Making Concessions to Individualism . . . 405 

331. H. G. Wells on Socialism as Social Democracy . . . 406 



CHAPTER VI 
LABOR PROBLEM. 

332. Nature of the Problem 413 

333. Aims of the Union 414 

334. Wage-worker as a Bargainer 417 

335. Closed Shop 417 

336. Boycott . . . . 418 

337. Opposition to Machinery 419 

338. Efforts to Restrict Trade Unions 420 

339. Methods of Conciliation and Arbitration ..... 423 



PART I: PRODUCTION 

CHAPTER I 

PROPERTY 

1, Economics defined. — Economics, the science of 
business, treats of man's activity in the acquisition of 
wealth. This science explains how wealth is created 
and made available for the satisfaction of human wants, 
and how the ownership of wealth produced is appor- 
tioned among the various agents who have contributed 
to its production. 

Wealth may be defined as consisting of everything 
which serves any human purpose and which nature does 
not supply gratuitously to man. Everything is, there- 
fore, included in the definition of wealth, to obtain which 
something will be given in exchange. This definition 
of wealth excludes some of the most desirable and nec- 
essary goods. Air and sunshine are indispensable to 
human existence. If they could not be obtained free, 
large sums would be given to obtain them. Since these 
goods are, however, commonly to be produced in un- 
limited quantities, as free gifts of nature, they are not 
counted as elements of wealth. They are known as 
free goods. 

In contrast with free goods are economic goods, 

which are those goods which have a value because their 

supply is limited. Wealth is the sum total of all 

economic goods. This division of all goods into two 

classes does not imply a hard and fast distinction be- 
I-i 1 



2 ECONOMICS 

tween them. Free goods pass into the class of economic 
goods the moment the demand for them exceeds the 
supply. Thus we consider water as a free good, but 
in our large cities a rental must be paid to obtain it, 
and there is also a large trade in spring and distilled 
water, which is bottled and sold at a high price. In the 
same way air and sunshine may become economic goods. 
The climate of the Jersey coast, for example, has a 
distinct economic value, and because of this climate enor- 
mous prices are paid for land contiguous to the shore. 

We may also distinguish between individual wealth 
consisting of goods exclusively possessed by individuals, 
and national wealth, which is the common property of 
the entire nation and cannot be aj)propriated by in- 
dividuals. The surface of Manhattan Island is worth 
several billion dollars to those who own it. The wealth 
of the United States, however, is not increased because of 
this fact. On the other hand, in our great systems of 
rivers the United States has a resource of incalculable 
value, no part of which, for the future at least, is likely 
to be appropriated by individuals. The subject matter 
of economics, therefore, to summarize our definition, 
consists of all those useful and desirable things which 
are so limited in quantity that they can be appropriated 
by individuals, or, another statement of the same 
thought, wealth consists of all useful and agreeable 
things except those which are freely supplied by nature. 

2. Private iwoperty. — Our next question concerns the 
institution of private property. Tlie right of property 
is defined by Blackstone as "that sole and despotic do- 
minion which one man claims and exercises over the 
external things of the world, in total exclusion of the 
right of any other individual in the universe." ^ The 

i Cooley's Blackstone, 3d Ed., Vol. I, Book 11, p. 1. 



PROPERTY 3 

origin of private property is explained by the same 
writer as arising out of the necessities of the various 
situations in which man found himself. Originally the 
right of possession continued only for the time during 
which the active possession lasted. The ground, for 
example, was originally everywhere held in com- 
mon, no part of it being the property of any one in par- 
ticular, "yet whoever was in the occupation of any deter- 
mined spot of it, for rest, for shade, or the like, acquired 
for the time a sort of ownership, from which it would 
have been unjust, and contrary to the law of nature, 
to have driven him by force; but the instant that he 
quitted the use or occupation of it, another might seize 
it, without injustice." ^ 

This community of ownership, however, was only 
transitory. To continue Blackstone's explanation: 

But when mankind increased in number, craft, and ambition, 
it became necessary to entertain conceptions of more permanent 
dominion; and to appropriate to individuals not the immediate 
use only, but the very substance of the thing to be used. Other- 
wise innumerable tumults must have arisen, and the good order of 
the world been continually broken and disturbed, while a variety 
of persons were^ striving who should get the first occupation of 
the same thing, or disputing which of them had actually gained 
it. As human life also grew more and more refined, abundance 
of conveniences were devised to render it more easy, commodious, 
and agreeable; as, habitations for shelter and safety, and rai- 
ment for warmth and decency. But no man would be at the 
trouble to provide either, so long as he had only a usufructuary 
property in them, which was to cease the instant that he quitted 
possession ; if, as soon as he walked out of his tent, or pulled off 
his garment, the next stranger who came by would have a right 
to inhabit the one, and to wear the other. In the case of habi- 

iCooley's Blackstone, Vol. I, Book II, p. 2. 



4 ECONOMICS 

tations in particular, it was natural to observe, that even the 
brute creation, to whom everything else was in common, main- 
tained a kind of pennanent proDerty in their dwellings, espe- 
cially for the protection of their jjung; that the birds of the 
air had nests, and the beasts of the field had caverns, the in- 
vasion of which they esteemed a very flagrant injustice, and 
would sacrifice their lives to preserve them.^ 

According- to Blackstone the idea of property in land, 
the exclusive dominion over the surface of the earth, 
was the last to be evolved. 

As the world by degrees grew more populous, it daily became 
more difficult to find out new spots to inhabit, without encroach- 
ing upon former occupants ; and by constantly occupying the 
same individual spot, the fruits of the earth were consumed, 
and its spontaneous produce destroyed, without any provision 
for a future supply of succession. It therefore became neces- 
sary to pursue some regular method of providing a constant 
subsistence ; and this necessity produced, or at least promoted 
and encouraged, the art of agriculture. And the art of agri- 
culture, by a regular connection and consequence, introduced and 
established the idea of a more permanent property in the soil 
than had hitherto been received and adopted. It was clear that 
the earth would not produce her fruits in sufficient quantities, 
without the assistance of tillage ; but who would be at the pains 
of tilling it, if another might watch an opportunity to seize 
upon and enjoy the product of his industry, art and labor? 
Had not therefore a separate property in lands, as well as mov- 
ables, been vested in some individuals, the world must have con- 
tinued a forest, and men have been mere animals of prey ; which, 
according to some philosophers, is the genuine state of nature.^ 

. 3. The right of private property. — The right of pri- 
vate property carries with it the following express 
provisions: First, the right to use; second, the right 

1 Cooley's Blackstone, Vol. I, Book II, p. 2. 
sCooley's Blackstone, Vol. I, Book II, p. 6. 



PROPERTY 5 

to dispose of by gift or by sale; third, the right to de- 
vise or bequeath. The owner of a farm, for example, 
has the right, in which he is protected by the state, to sell 
it or to exchange it for something else, and finally, to 
hand down this possession to his heirs. He has, in a 
word, the "free use, enjoyment and disposal of all his 
acquisitions without any control or diminution save only 
by the laws of the land." 

In every stage of society these rights have been sub- 
ject to certain limitations and restrictions whose ob- 
ject and eifect has been to render property more secure. 
These restrictions on the exclusive dominance over ma- 
terial things by individuals cannot exist except in cases 
of well-ordered society where established laws are en- 
forced by organized government. From the institution 
of property maintained by organized society which we 
call the state, two conclusions follow: First, that no 
man should use his property in a way opposed to the 
good of the community in which he lives and which 
protects him in his possession of this property; and sec- 
ond, that the state should have the right to take from 
him such portion of his property as may be necessary to 
preserve its existence and to achieve its ends. 

Custom and a sense of propriety demand of the in- 
dividual that he subordinate the exercise of the rights 
of private property to social interests and social require- 
ments. The owner of the property must, therefore, 
use it in such a way as not to injure or inconvenience 
his fellows. Thus he cannot keep a vicious dog un- 
chained; he cannot, in a town, keep gasoline for sale 
or use without proper precautions against explosions. 
The proprietors of manufacturing plants, the fumes 
from which, are offensive, are frequently required, when 
they are located in a large city, to build chimneys to 



6 ECONOMICS 

an enormous height in order that the fumes may be 
dissipated before descending to the level of the ground, 
or in cases where the waste products of factories when 
discharged into the streams pollute the source of water 
supply, the owners of these plants may be forced to 
provide, often at great expense, for some other means 
of disposal. 

4. Limitation of the right of private property by 
taxation. — The universal limitation of the right of 
private property is the right of taxation. Every prop- 
erty owner is required to contribute from his means to 
the support of the state, and the only limitation to the 
contribution which may be exacted from each, aside from 
the necessity of obtaining the consent of the majority 
and the business inexpediency of over-burdening incomes 
and industry, is found in the necessities of the state. 

5. Limitatiofi of the right of private property by 
public impr'ovenient. — No man can maintain his right to 
private property which is wanted for a work of public 
improvement. If a railroad is to be put through a 
man's farm, and he refuses to part with his property at 
a reasonable price, the railroad company may invoke the 
right of "eminent domain," and the courts, acting as 
the agents of the state, will place a fair value on the 
property which the railroad desires, and will compel the 
owner to accept this amount of money for his property. 
In many other ways the right of private property is 
limited by the necessities of social existence. 

Since private property would be impossible, however, 
without the constraint and support of organized society 
which protects its possessors in their ownership, these 
limitations are not to be considered as impairing the 
right of private ownership. It is generally agreed that 
the institution of private property conduces more to the 



PROPERTY 7 

general welfare of the community than any other which 
can be substituted for it. 

6. Effects of private property upon individuals. — 
Men will not exert themselves to produce more wealth 
than is needed for their immediate subsistence unless they 
are to be secured in the enjoyment of what they produce. 
In (countries such as Morocco or Turkey, where the right 
of property is disregarded by the government, and where 
accumulations of wealth are likely to be seized at any 
time by soldiers or officials, it is well known that only a 
small amount of wealth exists and that the people are 
miserably poor. In other countries, however, where 
property rights are secure, wealth is abundant and 
poverty is rare. Generally speaking, the prosperity of 
a people increases in proportion as individuals are se- 
cured in the possession and enjoyment of what they pro- 
duce or acquire. It was said by an eighteenth century 
writer, "Give a man the secure possession of a barren 
rock and he will turn it into a garden." 

This principle is well illustrated in a description of 
conditions of society in one of the remote valleys of the 
high Alps, written by Mr. H. D. Inglis many years ago : 

In the whole of the Engadine the land belongs to the peasan- 
try, who, like the inhabitants of every other place where this 
state of things exist, vary greatly in the extent of their pos- 
sessions, c . o Generally speaking, an Engadine peasant 
lives entirely upon the produce of his land, with the exception of 
the few articles of foreign growth required in his family, such 
as coffee, sugar and wine. Flax is grown, prepared, spun, and 
woven without ever leaving his house. He has also his own 
wool, which is converted into a blue coat without passing through 
the hands of either the dyer or the tailor. The country is in- 
capable of greater cultivation than It has received. All has been 
done for it that industry and an extreme love of gain can de- 



8 ECONOMICS 

vise. There is not a foot of waste land In the Engadine. 
Wherever grass will grow, there it is ; wherever a rock 
will bear a blade, verdure is seen upon it; wherever an ear of 
rye will ripen, there it is to be found. Barley and oats also 
have their appropriate spots ; and wherever it is appropriate to 
ripen a little patch of wheat, the cultivation of it is attempted. 
In no country in Europe will be found so few poor as in the 
Engadine. In the village of Suss, which contains about six 
hundred inhabitants, there is not a single individual who has not 
wherewithal to live comfortably, not a single individual who is 
indebted to others for one morsel that he eats.^ 

The same evidence is furnished by observers of the 
effect of immigration upon the thrift and acquisitiveness 
of the natives of Southern Italy. These southern 
Italians and Sicilians are at home miserably poor. The 
taxes on property are so high as to amount to practical 
confiscation. When working for others the farmer re- 
ceives only twenty to thirty cents a day, and the cost of 
living per individual does not exceed five cents per day. 
These poverty-stricken people have come to America in 
great numbers and some of them have settled in the 
country, where their accumulations of property have 
been extraordinary. In the town of Hammonton, New 
Jersey, for example, there were 323 Italians in 1904, 
most of whom landed with practically no money only 
a few years before, who owned 4,846 acres assessed at 
$176,575 and worth double that amount. Of the 1,370 
names on the tax register, 448, or one-third, were Ital- 
ians, of whom but 96 paid only a poll tax. One Italian 
owned six houses and fourteen acres of land valued at 
$10,000; another had a farm and business with an es- 
timated value of $15,000. The People's Bank of Ham- 

1- " Switzerland, the South of France and the Pyrenees in 1830," H. D. 
Inglis, Vol. I, Chapters 8 and 10, 



PROPERTY 9 

monton in September, 1890, had 450 deposit accounts 
on its books amounting to $87,080; only three of these 
accounts belonged to Italians and their aggregate 
amount was less than $500. In 1904, however, out of 
$260,779 on deposit, $56,614 or 21.7 per cent belonged 
to Italians. No better illustration of the stimulating 
effect of the exclusive use of the product of one's labor 
in stimulating industry and encouraging acquisition 
could be desired than the experience of these Sicilians 
whom General Francis A. Walker described as "beaten 
men from beaten races, the worst failures in the struggle 
for existence." 

We may conclude, therefore, that the right of prop- 
erty is justified by its results in the prosperity of the 
individual and the state. The burden of proof rests 
upon those who would substitute for private property 
some system of common ownership, such as Communism 
or Socialism, to show that these revivals of institutions 
which preceded private property would conduce more to 
the general welfare than the system which now prevails, 
and which has in its favor the accumulated experience of 
every civilized nation. 

Private property, as an institution, did not owe its origin to 
any of those considerations of utility which plead for the main- 
tenance of it when established. Enough is known of rude ages, 
both from history and from analogous states of society in our 
own time, to' show that tribunals (which always precede laws) 
were originally established, not to determine rights, but to 
repress violence and terminate quari-els. With this object chiefly 
in view, they naturally enough gave legal effect to first occu- 
pancy, by treating as the aggressor the person who first com- 
menced violence, by turning, or attempting to turn, another out 
of possession. The preservation of the peace, which was the 
original object of civil government, was thus attained; while 



10 ECONOMICS 

by confirming, to tliose who already possessed it, even what was 
not the fruit of personal exertion, a guarantee was incidentally 
given to them and others that they would be protected in what 
was so. 

In considering the institution of property as a question in 
social philosophy, we must leave out of consideration its actual 
origin in any of the existing nations of Europe. We may sup- 
pose a community unhampered by any previous possession ; a 
body of colonists, occupying for the first time an uninhabited 
country ; bringing nothing with them but what belonged to them 
in common, and having a clear field for the adoption of the insti- 
tutions and polity which they judged most expedient; required, 
therefore, to choose whether they would conduct the work of 
production on the principle of individual property, or on some 
system of common ownership and collective agency. 

If private property were adopted, we must presume that it 
would be accompanied by none of the initial inequalities and 
injustices which obstruct the beneficial operation of the principle 
in old societies. Every full-grawn man or woman, we must sup- 
pose, would be secured in the unfettered use and disposal of his 
or her bodily and mental faculties ; and the instruments of pro- 
duction, the land and tools, w^ould be divided fairly among them, 
so that all might start, in respect to outward appliances, on 
equal terms. It is possible also to conceive that in this original 
apportionment, compensation might be made for the injuries of 
nature, and the balance redressed by assigning to the less robust 
members of the community advantages in the distribution, suf- 
ficient to put them on a par with the rest. But the division, once 
made, would not again be interfered with ; individuals would be 
left to their own exertions and to the ordinary chances, for 
making an advantageous use of what was assigned to them. If 
individual property, on the contrary, were excluded, the plan 
which must be adopted would be to hold the land and all instru- 
ments of production as the joint property of the community, 
and to carry on the operations of industry on the common ac- 
count. The direction of the labor of the community would 
devolve upon a magistrate or magistrates, whom we maj' sup- 



PROPERTY 11 

pose elected by the suffrages of the community, and whom we 
must assume to be voluntarily obeyed by them. The division 
of the produce would in like manner be a public act. The prin- 
ciple might either be that of complete equality, or of apportion- 
ment to the necessities or deserts of individuals, in whatever man- 
ner might be conformable to the ideas of justice or policy 
prevailing in the community. 

Examples of such associations, on a small scale, are the mo- 
nastic orders, the Moravians, the followers of Rapp, and others : 
and from the hopes which they hold out of relief from the mis- 
eries and iniquities of a state of much inequality of wealth, 
schemes for a larger application of the same idea have reap- 
peared and become popular at all periods of active speculation 
on the first principles of society. In an age like the present, 
when a general reconsideration of all first principles is felt to 
be inevitable, and when more than at any former period of his- 
tory the suffering portions of the community have a voice in 
the discussion, it was impossible but that ideas of this nature 
should spread far and wide. The late revolutions in Europe 
have thrown up a great amount of speculation of this character, 
and an unusual share of attention has consequently been drawn 
to the various forms which these ideas have assumed ; nor is this 
attention likely to diminish, but on the contrary, to increase more 
and more. 

The assailants of the principle of individual property may be 
divided into two classes: those whose scheme implies absolute 
equality in the distribution of the physical means of life and 
enjoyment, and those who admit inequality, but grounded on 
some principle, or supposed principle, of justice or general ex- 
pediency, and not, like so many of the existing social inequali- 
ties, dependent on accident alone. At the head of the first class, 
as the earliest of those belonging to the present generation, must 
be placed Mr. Owen and his followers. M. Louis Blanc and 
M. Cabet have more recently become conspicuous as apostles of 
similar doctrines (though the former advocates equality of dis- 
tribution only as a transition to a still higher standard of jus- 
tice, that all should work according to their capacity, and re- 



12 ECONOMICS 

ceive according to their wants). The characteristic name of 
this economical system is Communism, a word of continental 
origin only of late introduced into this country. The word 
Socialism, which originated among the English Communists, and 
was assumed by them as a name to designate their own doctrine, 
is now, on the Continent, employed in a larger sense ; not neces- 
sarily implying Communism, or the entire abolition of private 
property, but applied to any system which requires that the land 
and the instruments of production should be the property, not 
of individuals, but of communities or associations, or of the gov- 
ernment. — J. S. Mill, "Political Economy/' Book II, Chapter I, 
Section 2. 



CHAPTER II 

PRODUCTION 

7. Production and producer defined. — ^We have de- 
termined that wealth includes all those commodities and 
properties in the community which can be appropriated 
and which are desired by man. This property of being 
desired we may define as utility. Utility should be 
sharply distinguished from usefulness. Many goods 
may be extremely useful, such for example, as a gallon 
of water, but may have no value whatever placed upon 
tliem because they can be obtained without effort or sac- 
lifice. A gallon of whiskey, on the^other hand, may be 
extremely harmful and yet, because of its scarcity and 
the difficulty of producing it, as well as because of the 
strength of the appetite to which it ministers, may sell at 
$6. The science of economics, however, is not concerned 
with the usefulness of commodities. The only questions 
which it asks concerning a commodity are, has it utility, 
do men desire it, will they pay money for it or put them- 
selves to trouble and inconvenience in order to obtain it ? 

We may now define the production of wealth as the 
process of increasing utility. Any act which directly 
or indirectly increases the utility or desirability of a 
commodity is an act of production. The farmer clears 
a piece of land, rendering it fit for tillage; he is a pro- 
ducer. The wholesaler buys goods from the manufac- 
turer and sells them to the retailer in such quantities 
as the retailer may conveniently dispose of them to the 
consumer; he is a producer. The retailer places these 

IS 



14. ECONOMICS 

goods upon his shelves and sells them in many small 
quantities to the consumer ; he is also a producer. Every 
person who is engaged in increasing the desirability of 
commodities is engaged in production. Every person 
who is engaged in increasing the utility of commodities, 
and this may be determined by ascertaining whether 
he is increasing the money value of commodities, is 
engaged in production. It is possible, without stretch- 
ing the definition of production too far, to include 
among the producers, a large number of people who 
are not directly engaged in increasing the utility of 
goods. The policeman may thus be considered a pro- 
ducer; the school teacher who increases the efficiency 
of his pupils is a producer; the official who administers 
a public department concerned, let us say, with supply- 
ing pure water or light to a community, is also a pro- 
ducer. 

8. Forms of production. — There are four principal 
forms of production. They include those acts which 
result in creating (1) utility of place, (2) utility of 
form, (3) utility of time, and (4) utility of possession. 
In the business life of the nation, the first set of acts 
is represented by transportation; the second by manu- 
facturing; the third, by storage; and the fourth by trad- 
ing and exchange. All of these activities are forms 
of production, as they each result in increasing the de- 
sirability or utility of certain commodities. There are 
familiar illustrations of these different means of pro- 
duction. The miner blasts out iron ore, conveys it to 
the surface of the ground, and ships it by rail and 
lake a thousand miles to the blast furnaces at Pitts- 
burgh. These are acts of production. The ore is of 
no use either in the ground or at tlie head of Lake 
Superior where it was mined. At the foot of the Lakes, 



PRODUCTION 15 

however, it becomes of great value. The blast furnace 
operating near Pittsburgh purchases Lake Superior 
ores at the mines at about $2 per ton; carried to an 
upper lake port this same ore is worth $2.60; on 
reaching a lower lake port its value is $3.05 and at 
Pittsburgh, its destination, $4.05. These successive in- 
creases in price show the increase in utility which have 
resulted from the transportation of the ore from one 
place to another. At the blast furnace men convert the 
ore into iron by mixing it with coke and limestone 
and applying the action of heat to the mass. In iron 
smelting the object is to free the iron from oxygen 
and various impurities which are associated with it. 
This is done by mixing it with coke and limestone in 
alternating layers. The mass is then set on fire and 
the blast of air is forced through it to hasten combustion. 
The oxygen is released during the process, uniting with 
the rocky material in the iron ore and forming slag. 
The iron is thus set free and becomes heavier, gradually 
sinking to the bottom of the furnace, from which it is 
drawn off. 

We have here production resulting in a complete 
change in form and a still further increase in value. 
Pig iron sells, say, at $16 per ton. This pig iron is 
still further de-oxidized and converted into steel ingots 
and into steel rails which sell at $28 per ton. From 
these acts of mining, transportation and manufacturing, 
creating place and form utilities, two tons of iron ore 
valued at $8 ultimately receive a value of $28. Instead 
of being made into steel rails, the steel in the form of 
ingots or bars may be shipped to Philadelphia. Again 
the change in place makes an increase in utility resulting 
in an increase in price, which corresponds roughly to 
the transportation rate between the two cities. In Phil- 



16 ECONOMICS 

adelphia the steel is made into boilers, another change 
in form. A boiler of standard quality, complete with 
fittings, weighing about 33,000 pounds, is worth in the 
neighborhood of $1,250 or about $76 per ton of steel 
which enters into it. These boilers are then shipped to 
a town in central Pennsylvania, another change in place, 
and a further addition to the utility and price. Set 
up and ready for use their value will have increased from 
$350 to $500, depending upon changes in location and 
condition. 

9. 2H7ne utilities. — Time utilities are of less impor- 
tance. Ice has in winter practically no utility, and but 
little of it can be sold. By the time warm weather ar- 
rives its utility has increased many fold. Wheat, just 
after harvest, ordinarily sells at much lower prices than 
after it has been kept during the winter. Here are ex- 
amples of time utility, the increasing of the desirability 
of an article by holding it from one season to another. 

10. Possession utilities. — Possession utility arises 
when a wholesaler sells goods to a jobber or when the re- 
tail merchant sells his goods to a consumer. By a 
change of possession the goods sold gain in utility, a 
fact evidenced by the increased price at which they are 
sold. A lot of hammers, for example, have a certain 
utility in the hands of the manufacturer, but the man- 
ufacturer has* no means of marketing his products to 
the consumer. He therefore sells to the jobber, who 
finds it profitable to sell hammers to small retailers in 
dozen lots, because at the same time he may be selling 
to the same retailer five or six other items also in dozen I 
lots. A gross of haixaners in the hands of the manufac- 
turer has, therefore, less utility than in the hands of 
the jobber. 

The manufacturer may charge the jobber $46 for a 



PRODUCTION 17 

gross of hammers which the jobber in turn sells to the 
retail trade for $54, and the retailer sells the same 
hammers over the counter to customers for $72 a gross. 
Again, goods bought by a large department store in 
wholesale lots have one value. Assorted, artistically 
arranged and ready for sale in single units to the cus- 
tomer, they have a much higher value. The same illus- 
tration may be used to show that possession utility is 
increased when the goods in question are actually in 
the hands of the consumer. Because of this increase 
he is. willing to pay a price high enough to induce the 
retailer to part with his goods. In this manner with 
each transfer of the goods from the possession of one 
individual to another, their utility and their price in- 
creases. 

11. Agents of production. — There are three agents or 
factors in production, two primary and one secondary; 
the primary supplied by nature and by labor — that is 
to say, muscular or mental activity exerted upon or 
in connection with these materials and forces. The 
secondary factor in production is capital. This con- 
sists of all the commodities employed not for consump- 
tion but for purposes of future production. The nature 
of capital will be a matter for subsequent examination. 

Production has already been defined as the creation of utilities. 
That man cannot create matter is a familiar truth. All that he 
, can do is to rearrange particles of matter so as to create form 
utihties ; or move goods from one part of the world to another 
so as to create place utilities ; or preserve goods from one period 
to another so as to create time utilities ; or, finally, transfer 
goods from the ownership of one individual to that of another 
so as to create possession utilities. Any activity which con- 
tributes to the creation of utilities in either of these ways is 
production. 
I 1—3 



18 ECONOMICS 

A school of French economists of the eighteenth century, 
the Physiocrats, gave currency to the behef that agriculture 
is productive in a special and peculiar sense. They even went 
so far as to characterize manufacturing and mercantile pur- 
suits as sterile, or unproductive. Adam Smith, writing in 1776, 
took vigorous exception to this view, but he, too, speaks of na- 
ture as "laboring along with man" in farming, implying that 
it does not "labor along with" him also in his other occupations. 
Completer knowledge of the real nature of production has eman- 
cipated most minds from these misconceptions. They reappear 
from time to time, however, in criticisms of the activity of mer- 
chants, who are said to create nothing, but to live, like parasites, 
by buying things for less and selling them for more than they 
are worth. The obvious reply to such attacks is that merchants 
create time, place and possession utilities and that human well- 
being depends as much upon these as upon the form utilities 
created by farmers and manufacturers. Convincing proof of 
the value of the services of merchants is furnished to city peo- 
ple when they go to live in the country in the summer and have 
to depend for the goods they require upon a distant and ill- 
stocked country store. The growing prevalence among country 
people of the practice of coming to town to do their shopping 
indicates, on the other hand, their practical appreciation of what 
the merchant docs for the community. 

As already implied, there are two essential factors in all pro- 
ductive processes: nature and man. Nature figures in produc- 
tion as an aggregate of materials and blind forces. Acting in 
conformity with invariable laws, she destroys as readily as she 
creates. Moreover, her productive services are always gratu- ' 
itous to him who has the intelligence to command them. Man, 
on the contrary, appears as a being with conscious purpose. 
He also destroys — not ruthlessly, however, as nature seems to j 
do, but in order to gratify his wants. In production man is the j 
directing, active agent, nature the obedient, passive agency, j 
Man marshals the materials and productive forces which nature i 
supplies in the ways that experience has taught him to be best, | 
and he alone enjoys the fruits of productive enterprise. 



PRODUCTION 19 

Man and' nature are the primary factors in production ; sec- 
ondary or derived from them is capital, the products of past 
industry used as aids to further production. With the abun- 
dant evidence on every side of the dominant role which power 
machinery and other forms of capital play in production as 
now carried on there is little need to emphasize the importance 
of this third factor. To capital is chiefly due the efficiency of 
contemporary productive methods, as contrasted with those of 
one hundred and fifty years ago, and also the division of the 
working population into employers and employes. These 
truths are so familiar to everyone that it is not so much the 
importance of capital as the fact that it is not an independent 
but a derivative factor in production that requires emphasis. — 
H. R. Seager, "Economics : Briefer Course," pp. 60-6^, 



CHAPTER III 

NATURAL AGENTS 

12. Free goods of nature and their transformation. — - 
In our study^ of production we have first to examine the 
function of nature in the production of wealth. Of the 
commodities which are fitted to supply human wants, 
some grow up spontaneously as the free gifts of nature 
without any labor being expended upon them. Ex- 
amples of such commodities are shellfish, berries, fruit 
and nuts. In the tropics, the profusion of natural 
products is so great that man can subsist without exert- 
ing more labor than is necessary to gather the fruit 
from the trees and the fish from the shore. Fruits and 
nuts in great profusion and almost endless variety fall 
or hang from the trees. The streams swarm with fish, 
which can easily be caught at all seasons of the year. 
Game also is abundant. Cold is unknown, clothing and 
shelter almost superfluous. Under such conditions man 
does not need to work and he is content to sleep and idle 
his life away, sustaining himself without working. Gen- 
eration after generation, century upon century find 
him still in the same condition of drowsy indifference. 
Progress and improvement are not thought of, because 
the inducement is lacking. Man is entirely comfortable 
and secure in his comfort. Man is by nature little more 
disposed than the lower animals to hard work and stren- 
uous endeavor. 

In the colder regions conditions are different. Here 
the climate is harsh and inclement. The winters are 

20 



NATURAL AGENTS 21 

severe, locking up land and water in snow and ice. 
The spontaneous productions of the forest are less 
abundant and must be won with more labor. In the 
North man must work and work hard in order to live. 
Unless he works and plans, unless he denies himself 
present satisfaction in order to provide for future 
wants, he will perish. Compelled to exertion, he begins 
to subdue the difficulties which encompass him. He 
builds houses for shelter. He provides clothing. In 
order that food may always be at hand, he develops 
agriculture and domesticates animals. By slow degrees 
he organizes civil society, so that by the united strength 
and cooperative effort of many hands his hard task may 
become easy. In short, he begins to get the better of 
the physical conditions of soil, climate, vegetation and 
animal life which surround him. He becomes, as we 
say, master of his environment. It is in those regions 
where means of subsistence can be provided only by 
labor, that we find the great civilization of the world. 

13. Changes in form and place required by pro- 
duction. — Generally speaking the materials supplied by 
nature are only available for human use after changing 
their form or their place. There is little resemblance 
between a lump of iron ore and a coil of wire, between a 
bag of cocoons and a bolt of silk, or between a pile of 
sand and a pane of glass. Almost every commodity, 
before it is ready for human use, must be subjected 
to a long anterior series of transformations and manip- 
ulations. Consider, for example, the process of produc- 
ing a loaf of bread. The ground must be cleared, 
ploughed and harrowed, planted with seed, cultivated, 
the crop harvested, the grain threshed, carried to the 
mill, ground and bolted, and finally the flour must be 
mixed and the bread bakedo 



Sg ECONOMICS 

Although the materials supplied by nature must usu- 
ally be transformed before they are fit for consump- 
tion, the substances out of which these goods are made 
are derived from the ground, the forest or the sea. 
Without an abundant supply of these materials, pro- 
duction is small. The rapid increase of industry in 
the United States, and the assured industrial future 
of this country rest upon the foundation of abundant 
raw materials. In fuel of all kinds, in all metallic ores, 
in lumber and in the products of agriculture, the United 
States is better provided than any other region in the 
world. Out of these materials the energy of the Amer- 
ican people, assisted by the progress of invention and 
improvement and helped also by capital contributed by 
Europe, has created within one hundred years the most 
prosperous industrial nation the world has ever seen. 
^^1^. Latent powers of nature. — Nature supplies to 
production not merely materials but also forces and 
natural properties of which man makes large and in- 
creasing use in production; without whose aid indeed 
production, as we now understand it, would be impos- 
sible. The universe about us is a vast reservoir of 
power. Power almost unlimited is latent in the coal 
mines which contribute each year to the service of man 
only the minutest fraction of their stored-up energy. 
Because it is the principal source of power, coal is 
undoubtedly the most important of all mineral raw 
materials of industry. In this age of steam-driven 
machinery, coal represents power, and where nearly 
every manufacturing process is conducted on a large 
scale in huge mills and factories, cheap coal is essential 
to economical production. At every stage of the 
economic process coal is our servant. It smelts the iron 
out of which our agricultural, milling and transporta- 



NATURAL AGENTS 23 

tion machinery is made. It transports the grain to the 
mill and grinds it into flour. It carries the flour to 
the customer and finally converts it into bread. Coal 
weaves our clothing, saws and planes our lumber, fluxes 
our hard metals into workable condition, and performs 
for us almost every act and process of our modern life. 
"This has been called the iron age, and it is true that 
by its strength, endurance and wide range of qualities 
iron is the material of novelties and is fitted to be 
the fulcrum and lever of works, while steam is the mo- 
tive power. But coal alone can produce in sufficient 
abundance either iron or steam; coal, therefore, com- 
mands this age — the age of coal. Indeed, coal stands 
not merely beside but entirely above all other com- 
modities. It is thcr material energy of the country; 
the universal aid, a factor in everything we do. With 
it, almost any feat is possible ; without it, we are thrown 
back into the laborious poverty of early times." ^ Power 
is more visibly seen in the rush of streams and in the 
heaving tides. The sun is every day pouring great 
cataracts of power upon the earth. Compared with the 
power and force of nature, the strength of men and 
animals is insignificant. 

Most important of these natural resources are the 
forces of the soil called into action by heat and moisture, 
whose operation is illustrated by the varied and mani- 
fold processes of agriculture. Single acres of land may 
yield under scientific farming as much as 1,300 pounds 
of cotton or 100 bushels of corn. The force of heat is 
present in all metallurgical operations and also the gen- 
eration of steam. The force of gravitation is now 
utilized in water power. The total horse power em- 
ployed in manufacturing in 1909 was 18,680,776. To 

1 " The Coal Question," W. S. Jevons. 



24. ECONOMICS 

supply this demand, it is stated that Niagara Falls is 
capable of developing between six and seven millions 
of horse power, and Niagara, though the largest, is 
only one of many falls in the country. Steam and 
water power are transmitted into electric power, which 
is sent long distances from the place of generation. 
One of the water power companies of Niagara Falls 
supplies a considerable amount of electric power to 
Buffalo. The Buffalo Street Railways are operated by 
means of this power, bake shops; are run, street and 
house lighting is supplied, grain elevators are operated 
and factory power is provided. 

15. Importance of properties of matter in produc- 
tion. — In addition to these natural forces, a large num- 
ber of qualities or properties of goods play an impor- 
tant part in production. It is the ductility of copper 
that gives that metal its high commercial value. There 
are other metals which are good transmitters of elec- 
tricity, but they fail to be of service to man in this 
capacity, because they cannot readily be drawn out 
into wire. Hardness is an invaluable quality. The 
value of steel, for many uses, increases in direct ratio 
with its hardness. Again, there is the property of 
malleability by virtue of which property, iron and steel 
can be flattened out into large sheets. Tenacity is an- 
other valuable property of matter. It is the tenacity of 
steel which makes possible our skyscrapers and gigantic 
steel bridges. The force of cohesion makes possible 
the manufacture of cloth. These properties, along 
with many others, constantly play important roles in 
the industrial life of man. 

In proportion as man has succeeded in getting mas- 
tery of these natural forces and in utilizing the various 
properties of matter, has material civilization developed. 



. NATURAL AGENTS 25 

This task of subjugation is, however, far from being 
accomphshed. Only a small fraction of the power 
available in nature is at man's disposal. For example, 
only 10 per cent of the heat latent in coal is now 
utilized in the process of combustion. Even this small 
amount of power which man has, and the incomplete 
utilization of the contributions of nature to production, 
have been sufficient to lift from his shoulders much of 
the burden of hard toil by increasing the efficiency of his 
efforts one hundredfold. Our food, our clothing, our 
houses and our business are all conditioned by and de- 
pendent upon the use of ^ower and the properties of 
matter. 

In a general way nature may be said to assist in production 
by furnishing man with standing-room, with materials, and with 
chemical and physical forces. The motor forces of nature have 
been utilized by man principally in the forms of the muscular 
strength of animals, the motive force of winds and streams, 
the expansive force of steam, and the motive force of electricity. 

A detailed classification of nature's contributions to produc- 
tion may next be presented. First, all productive industry may 
be influenced by atmospheric or climatic conditions. These 
affect not only the animal and vegetable productions of a coun- 
try, but also the vigor and character of the inhabitants. Second, 
rivers, lakes, and seas should be mentioned. These may faciH- 
tate the transportation of persons and products ; and may fur- 
nish man with fish, coral, sponges, etc. Rivers may also sup- 
ply the water power that turns the wheels of many productive 
industries. Third, we must notice the contributions of the land 
surface of the earth. The land contributes to production 
standing-room, plants and animals, mineral treasures hidden for 
the most part below the surface, and the mineral and vegetable 
elements that form fertile soils. Mere situation is often of the 
greatest importance, as is seen in the case of a city or country 



26 ECONOaiKS 

lofnU'd at an inipoilanl point aloiii;' llie roiitos wliicli llu- com- 
nuM'cT of till" world is ohiiood to follow. 

Of the contributions of nature to [)roduc'tlon sonic are ap- 
propriable, while others practically cannot be reilucetl to owner- 
ship by individuals or by societies. Land is appropriable, as 
uell as the products secured from the land. Air and sunlight 
are for all practical purposes not ap^iropriable, except in so far 
as the enjoyment of them may depend u})on access to certain 
pieces of land. 'JMie Avaters ot' the earth's surface cannot be 
aj)pro[)riated, e\ce})t in cases where access to them depends upon 
the control of land. Inland waters and the borders of the ocean 
to the extent of three miles seaward are appropriated by the 
nations that control adjai'iMit territory. U'he appropriable con- 
tributions of nature are actually reduced to private ownership 
as soon as they become scarce relatively to human wants. When 
j)()j)ulat ion is si-anty, and men lead a nomadic Hie, land is not 
held as private property. But as luunbers increase, and unoc- 
cu[)ied land becomes scarce, the soil is broui^'ht. under private 
ownership. ^ 

Some writers have attempted to explain the whole of man's 
social as well as his economic life by reference to the influem-e 
of the natui'al surroiuidings of each connnunity. In this way 
it is said that the inland plains o'ivc rise to a pastoml form 
of eciuioniii' life, that the seashore causes people to live as 
fishermen, and that forests produce the tribes of hunters. From 
the natural atliliation or combination of these three forms of' 
sim[ile economic societies, all inimplex or civilized societies aii" 
deri\ed. But such a view exao'gvrates, tis it is very eas^' to do. 
the extent to which natural surroundino-s determine the life of a 
people : and it neglects the fact that man in a thousand ways 
niav modify his environment. ]Man can reclaim land from the 
sea, can irrig-ate arid lands, can tiuuiel the Alps, and can con- 
struct a railroail through the Rocky ^Mountains or across the 
Andes. The eciMiomic development of our own country has been 
verv greatlv intluenei-il liy natural I'onilitions. 'I'he infertility 
of the soil oi' New iMigland compelled that section to utilize 
its forests for ship' building, and its rapid streams for power 



NATURAL AGENTS STt' 

for nianufacturhig. The fertile soil of the Soiitli marked tliat 
section out as an agricultural region. The rivers of the Mis- 
sissippi Valley helped to extend settlements, and to facilitate the 
rapid growth of the interior of our continent. In general, 
it may be said that the tendency of economic progress is k) 
free man more and more from the influence of nature. It took 
nearly two hundred years for English colonists to advance their 
settlements from the Atlantic coast to tlie valley of the Missis- 
sippi. But the steamboat and the railroad enabled the people 
of tlie United States to spread over the territory between the 
Alleglianies and the Pacific in three-quarters of a century.^ 
1 C. J. Bullock, " Introduction to the Study of Economics," pp. 118-l!^l. 



CHAPTER IV 

LABOR 

16; Labor defined. — Labor may be defined as phys- 
ical or mental exertion directed toward the production 
of wealth. The two forms of exertion are generally 
united. Most forms of so-called brain work require 
some muscular activity, and the lowest manual labor re- 
quires a certain amount of intelligence. There is little 
need, therefore, to discriminate between the respective 
contributions of brain and muscle to production. This 
may be proven by any one who takes the trouble to 
watch the working of common laborers. Men are fre- 
quently found who do double the work of other men 
solely because in using the pick or the shovel, or trun- 
dling the wheelbarrow, or carrying the hod, they put 
intelligence into their work. To look at the matter 
from the other side, the labors of some of our greatest 
thinkers, such as Herbert Spencer, Prescott and Pasteur 
have been seriously hampered by physical infirmities, 
and the achievements of Mr. Gladstone were only made 
possible by a splendid pliysical constitution. 

17. Analysis of labor. — Labor consists of putting 
things into motion. All that motion does in production 
is to change the position of things. 

If we examine any case of what is called action of man upon 
nature we will find that the power of nature or the property of 
matter do all the work, when once objects are put Into the right 
position. This one operation of putting things into fit places 
for being acted upon by their own internal forces, and by those 

28 



LABOR 29 

residing in other natural objects, is all that man does, or can 
do, with matter. He only moves one thing to or from another 
place. He moves a seed into the ground, and the natural forces 
of vegetation produce in succession a root, a stem, leaves, flow- 
ers and fruit. He moves an axe through a tree, and it falls by 
the natural force of gravitation ; he moves a saw through it, in 
a particular manner, and the physical properties by which a 
softer substance gives way before a harder, makes it separate 
into planks, which he arranges in certain positions with nails 
driven through them, or adhesive matter between them, and pro- 
duces a table, or a house.^ 

18. Qualities that determine efficiency. — The qualities 
which determine efficiency of labor may be classed under 
three heads: physical, mental and moral. Included in 
the first are health, strength and energy. The mental 
qualities may all be included under intelligence, and 
the moral qualities under honesty, ambition and perse- 
verance. 

19. Physical efficiency. — The laborer's physical effi- 
ciency depends upon two factors, inheritance and 
environment. The races of man differ widely in their 
physical capacities for production. It has been observed 
that the Slav, the Pole or the Hun, is physically much 
stronger than the Italian, and is capable of much heav- 
ier work. On the other hand, the Italian is more pains- 
taking than the Slav. This gives the Slav an advantage 
in rough, heavy work, such as coal mining, and it gives 
the Itahan an advantage in truck farming and other 
forms of intensive agriculture which require close atten- 
tion and careful supervision. 

The laborer's efficiency is also very largely influenced 
by his environment. By this term "environment" we 
mean all of the conditions under which the laborer lives. 

1" Principles of Political Economy," J. S. Mill, p. 16. 



so ECONOMICS 

In order that he may do his best work, he requires good 
and abundant food, clothing suited to the chmate, 
pleasant home surroundings, clean streets, pure water, 
good government and wages sufficient not merely for 
comfortable subsistence but also for saving. 

The necessity of securing a proper physical environ- 
ment is now generally recognized, and is the basis of 
what is known as "welfare work," or betterment work, 
which is carried on by large employers of labor and 
also by means of legislation and administration which is 
undertaken by the state. The industrial betterment 
movement in the United States is of comparatively 
recent origin. It is only within the last decade that 
the subject has been given any attention, and its general 
establishment has been even more recent. Employers 
are now coming to recognize that consideration for the 
welfare, safety and loyalty of their employes is an im- 
portant factor in commercial success. Men do not 
engage in business from philanthropic motives, and 
modern methods of factory management must be based 
not on sentiment but on sound economic principles. 
The object of any industrial enterprise is to make money 
for its owners. In order to do this, expensive ma- 
chinery is placed in the factory where it will do its best 
work; it is protected from dust, kept well oiled and in 
good repair. In like manner, workmen who. operate 
machinery must be kept in good condition if the em- 
ployer is to receive the greatest neturn for the wages he 
pays. Good light, pure air, cheerful surroundings, 
cleanliness, provision for a reasonable degree of com- 
fort, all these things have a commercial value. The 
more favorable are the conditions under which work is 
to be performed, the higher will be the type of work- 



LABOR 31 

men attracted to the plant, and the more permanent 
will be then' ser^ce. 

The United States has more factories of this char- 
acter than any other country in the world. Massachu- 
setts manufacturers were the first to interest themselves 
in betterment work. They were soon followed by man- 
ufacturers in the middle western and western states, and 
last of all have the southern manufacturers adopted the 
same policy. To-day some form of industrial better- 
ment finds a place in most successful factories and mills. 
^20. Importance of safe and sanitary surroundings. — 
The most evident illustration of the general interest in 
industrial betterment is in the effort to obtain order and 
cleanliness in and about the works. New buildings are 
usually built with large window space admitting abun- 
dant light and air. Many firms have gone far in beauti- 
fying the surroundings of their works and have found 
the results very satisfactory. 

The most important phase of the industrial welfare 
movement is, however, due to the increased interest in 
safeguarding operatives from accidents. Factory legis- 
lation during recent years has done much to reduce the 
danger of accidents, but there are still far too many of 
them. Manufacturers are not eager to supply safety 
devices upon machinery which is already expensive, and 
operatives on piece work resent any appliance which 
is likely to restrict the output. A serious accident must 
sometimes bring workmen to their senses, before they 
appreciate the value of a device installed for their own 
protection. This prejudice against safety appliances is, 
however, rapidly being overcome. 

Great financial loss, especialty during periods when 
labor is scarce, may result from ill health of employes. 



32 ECONOMICS 

An epidemic of typhoid fever among the ojieratives 
of a large mill during 1906 was jusljy regarded as a 
calamity similar in destructive effect to a fire or flood. 
In the best works great care is taken in accepting only 
those employes who are physically sound. Those al- 
ready employed who are affected by tuberculosis are 
especially provided for, an effort being made to isolate 
them from other employes, while new applicants are 
not accepted. Persistent efforts are being made to 
combat alcoholism. Some of the largest employers of 
labor will not employ drinking men and have even car- 
ried their opposition so far as to discharge employes 
who are seen entering a saloon. The hygienic conditions 
of the factory receive closest attention. Wash rooms 
with individual basins are common, and even shower 
baths are sometimes provided. Ventilated closet lock- 
ers are now considered necessary. One factory at- 
tracted a large number of employes from a neighboring 
works by putting a steam pipe under its closet lockers. 
Workers arriving on a wet morning changed their wet 
clothes and shoes for others dry and warm and at night 
found their street suits thoroughly dried for their re- 
turn home. 

Medical service, ranging from the treatment of small 
diseases and facilities for rendering first aid to the in- 
jured, up to hospitals with complete equipment, is pro- 
vided in modern factories. The Colorado Fuel and 
Iron Company has a splendid hospital at Pueblo in addi- 
tion to simpler forms of medical relief in the various 
camps. The Illinois Steel Company at South Chicago 
maintains a hospital with constant medical and surgical 
attendance. 

21. Views of a work's inanager on industrial hct- 
terment. — These improved systems are described as fol- 



LABOR 33 

lows by Mr. Alexander E. Outerbridge, Jr., in an 
article published in the Amials of the American Acad- 
emy of Political and Social Science for January, 1903: 

Another important consideration of such innovations as the 
premium system is a care for the well-being of the employes. 
In my discussion of business and philanthropy I do not wish 
to be misunderstood or to seem to under-rate the advantages 
Yv'hich may accrue to employes, as well as to employers, of philan- 
thropic plans devised for the aid of sick, injured or infirm 
operatives. In one of the largest and most successful manu- 
facturing establishments in the world an admirable system is in 
vogue whereby unfortunate men are helped in time of need, but 
so judiciously and secretly is this done that the world knows 
nothing about it, and if I should name the establishment it would 
violate confidences that I have received, not from the managers 
of the works, but from men who have been thus aided in a way 
which has not awakened any other feeling than that of grati- 
tude. You cannot find any allusion to these matters in the 
rules posted up in the works, and in fact, I believe there are no 
rules on that sub j ect. There is no contract in existence ; there 
is no guarantee that if a man is injured, or if he is sick, or in 
trouble, that the helping hand will be extended to him, yet I 
doubt not that every one of the thousands of men employed 
in those shops goes to his daily work with a contented feeling 
that should an accident befall him while on duty, his family 
would be cared for while he might be incapacitated for work. 
It thus appears evident from whatever point of view the question 
may be studied that the value of the "personal equation" in the 
management of large industrial works is a most important factor 
in the successful conduct of affairs. 

Moreover, my views are pronouncedly towards recognizing 

the responsibility which rests upon the employer to the fullest 

extent practicable, not, however, based upon philanthropic 

grounds, but because observation has taught me that one of the 

most profitable investments of money that can be made in a 

manufacturing plant is to give the largest possible advantages, 
1—3 



34» ECONOMICS 

in the way of conveniences and sanitary arrangements, etc., to 
the operatives. I remember years ago finding it a difficult mat- 
ter to impress upon the superintendent of a foundry the im- 
portance of having the windows washed. They had not been 
washed for years, and on dark winter days the dimness in the 
foundry necessitated artificial light ; indeed at all times the con- 
ditions were bad for the eyes of the moulders. I had a great 
deal of trouble to get those windows washed, and yet I am quite 
sure that the cost was repaid in a very few days in the saving 
of bad work. The introduction of steam heat into another 
foundry that I am familiar with was a source of expense that 
the managers were loath to incur, but that was also a profitable 
improvement; it avoided irritating and blinding smoke in the 
foundry on cold mornings caused by lighting wood shavings on 
the dirt floor; not only did it contribute to the comfort of the 
men, but the steam heat kept the sand warm, and the moulds did 
not crumble as formerly by reason of the freezing of the mois- 
ture in the sand on cold nights. The introduction of shower 
baths, dressing rooms, water closets, and other similar comforts 
and conveniences, improves the character of the work and con- 
serves the health of the workmen. I maintain that every oper- 
ative who gets sick in the employ of a concern causes more or 
less loss, even though he may receive no wages during the time 
ho is incapacitated for work ; another and presumably an in- 
ferior or less experienced man must be put in his place and 
the interests of the firm must therefore suffer. For this reason 
I believe that every kind of legitimate comfort and convenience 
that may be provided for the operatives is a source of profit to 
the employer altogether apart from the moral obligation to care 
for the health and comfort of the employe. 

22. Factory legislation. — The safeguarding of the 
health, safety and comfort of employes is not left en- 
tirely to the self-interest of the employer. The state 
has taken cognizance of these necessities in a large num- 
ber of so-called factory laws. 

There is not a state in the Union that does not have 



LABOR 35 

some factory legislation. In many states the laws go 
into great detail. It requires almost a thousand pages 
of a finely printed government report to contain the 
factory, woman and child labor laws of the respective 
states. Unfortunately, all the laws of the various 
states do not show the same amount of wisdom and 
breadth of view but there seems to be a growing tend- 
ency toward greater uniformity and higher standards. 

The factory law proper usually includes sections on 
fire escapes, fire extinguishers, safety devices on ele- 
vators, guards for machinery and similar subjects. 
Labor laws usually include certain restrictions on 
woman's labor. She may not engage in certain occupa- 
tions, e. g., manual labor in or about any mine. She 
is prohibited from working over a definite number of 
hours per day and per week. Often seats and other 
physical comforts are guaranteed her by law. The 
state thus limits her freedom of contract on the ground 
of the future welfare of the race. The courts have up- 
held this course as part of the police power of the state. 

The child labor laws usually include four important 
points: First, the age under which a child can work 
under no considerations, usually fourteen years in the 
northern states. Second, the requirement that between 
fourteen and sixteen years the child may not w;ork 
unless it has proven its age and has a school certificate 
that it can read and write the English language. Third, 
night work is usually prohibited, if not entirely, then in 
part. Fourth, the number of hours per day and per 
week are prescribed. These vary considerably. In 
New York they are eight per day and forty-eight per 
week. 

The circumstances influencing health and strength are well 
understood. Fresh air and exercise, good food, adequate pro* 



36 ECONOMICS 

tection from dampness and sudden changes in temperature and 
the avoidance of all kinds of excesses, are the principal requisites. 
Of these good food is perhaps the most important. The human 
body resembles a machine, and the amount of work it can do 
depends very largely on the quality and quantity of the fuel, 
that is, the food, with which it is supplied. At the present time 
vigorous measures are being taken in all progressive countries 
to provide the requisites to health and strength for all classes. 
Sanitation and factory acts have been passed to insure the health- 
fulness of the conditions under Avhich men work. A great deal 
of attention is being given, especially in those countries which 
maintain large standing armies, to the question of determining 
what diets are best for people doing different kinds of work, 
and model kitchens are being organized in the poorer quarters 
of cities to teach people to appreciate nutritious and properly 
prepared foods. Efforts to improve the tenement houses in 
which the populations of the larger cities live are also being put 
forth and with some success. Mention should also be made of 
the public baths, the playgrounds for children and the open-air 
gymnasiums which are being erected in those cities in Europe 
and America which are most progressive in caring for their 
inhabitants. Finally, it would be difficult to exaggerate the 
importance of the efforts that are just now being made to stamp 
out two of the most devastating diseases from which the human 
race has suffered, yellow fever and consumption. As is shown 
by mortality statistics, these efforts are beginning to bear fruit 
in the improved health of present-day cit}' populations, but 
much yet remains to be done for both city and country people. 
There is no form of philanthropic activity which is more certain 
to benefit mankind than that designed to improve the conditions 
under which the mass of men live and work. Restored health 
and vigor are blessings in themselves, but equally important is 
the fact that they make for more efficient production and enable 
their possessors not only to hold what they have gained, but to 
add steadily to their advantages through their increased earn- 
ing power. Every improvement that can be made in home and 
factory surroundings without undermining the independence and 



LABOR 37 

self-respect of the population is thus a certain means of "help- 
ing people to help themselves." ^ 

23. Extra-husiness relations between employers and 
employes. — This subject belongs rather to the field of 
Sociology than to that of business management, but 
owing to its bearing upon the management of industry 
it will here be considered. It is a proposition almost 
self-evident that the employer's interest is furthered by 
his possessing the good will of his employes. No man 
will work so well for wages alone as he will work when, 
in addition to the wages he receives, is added the con- 
sciousness that his employer is interested in his welfare ; 
that he will promote him as fast as he deserves it; that 
his employer will care for him in sickness, and, so far as 
possible, look after his family in case of his death; 
that his sons will have the preference when vacancies 
occur in the mill; that he will be fairly paid for over- 
time ; that his wages will increase with the profits of the 
business, and, in general, that his employer will do to 
him as he, the employer, would wish to be done by were 
the positions reversed. Many firms and companies bear 
just those relations to their workmen, and it need hardly 
be said that they do not lose any money by their policy 
of kindness. Few businesses are so large that the em- 
ployer cannot know something of the circumstances of 
his subordinates, and friendly interest is an outlay which 
never fails to bring in large and quick returns. 

Let us explain more fully as to particulars. The 
employer owes to his employes healthful surroundings; 
large and light rooms with plenty of air space and good 
ventilation, well warmed in winter and when possible 
cooled in summer; he owes them the best sanitary con- 
veniences, and he will not go far astray if he provides 

1 H. R. Seager, "Economics: Briefer Course," pp, 74-5. 



38 ECONOMICS 

lockers for their street clothing. He further owes it to 
his employes to protect them, as far as possible, from 
the risks incident to their occupation; to put railings 
about dangerous machinery, to case belts, to put guard 
rails on stairs, to sand slippery floors, and to see that 
boilers are regularly inspected. It is an employer's 
duty to do these things, and for fear that short-sighted 
or penurious men should neglect to do them, the law in- 
sists that they shall be done, prescribes penalties for 
neglect to obey its commands, and employs inspectors 
to see that these regulations are obeyed. The employer 
further owes to his employes reasonable hours and 
living wages, and he owes it to them and also to himself 
to take a friendly interest in their welfare. These mat- 
ters have already been noticed. 

The question now arises. Shall the employer go further 
than this? Shall he do more than self-interest directs; 
shall he provide libraries, gymnasiums, baths and amuse- 
ments for his workers, as some employers have done 
and as most people think that all employers should do? 
There is no hesitation in answering in the negative. 
Philanthropy of this sort is altogether out of place and 
tends to pauperize the recipients. A man works for 
wages. The self-interest of his employer and common 
friendliness and humanity demand that the worker be 
kindly treated and assisted in misfortune. But to go 
further than this is not demanded. It is far better for 
workmen to provide such things for themselves than that 
they should be presented with them. If living wages 
are paid, a margin will usually remain for luxury and 
amusement. Experience has shown that workmen pre- 
fer to take their wages in cash rather than in part 
cash and part philanthropy. 



CHAPTER V 

TRAINING OF WORKERS 

24. Mental efficiency of labor. — The intelligence of 
workmen is largely dependent upon his inheritancCo 
Thus negroes are proverbially stupid, and the Irish 
quick and alert. Each nationality differs from every 
other in the ability of its members to think. Artistic 
ability seems to be possessed in larger measure by the 
French than by any other nation; the Germans, on the 
other hand, are more painstaking and thorough in their 
mental processes than any other nationality. 

Although intelligence depends primarily upon in- 
heritance, mental efficiency can be greatly increased by 
education. It is especially important, and this has not 
as yet been generally recognized in the United States, 
that a common school education should contain the 
largest possible amount of practical training. Manual 
training should be taught in the lower grades, and more 
advanced technical instruction in the high schools. Edu- 
cation, especially of a practical character, may be looked 
upon as capital invested in the coming generation. It 
makes individuals more valuable, not merely to society, 
but to themselves. Formerly, in the home and in the 
shop, the boy received a quite complete training, not 
merely general but qualifying him for some handicraft. 
In the growing specialization in industry, however, and 
especially with the organization of industry into large 
factories, such opportunities for training have 

39 



40 ECONOMICS 

nearly disappeared. The public schools are, there- 
fore, obliged to take upon themselves new obligations. 
The technical school and manual training high school 
have been grafted on our educational system to meet 
the demands for. 

boys who possess trained hands and eyes, . . . boys who 
are able to plan and to execute, boys who are industrious and 
not afraid of overalls and jumpers — boys who have, to a high 
degree, the power of applying knowledge to industrial opera- 
tions. The value of a good home in the building of character 
is not minimized or called into question, but the changed en- 
vironment in and about the home, its complete isolation from 
productive industry, cooking excepted, has caused it to lose its 
leading position as a factor in industrial training. 
The boy who goes into the shop in early youth must be taught 
neatness and accuracy ; he should understand the elementary 
principles of wood and metal working, mechanical drawing, 
algebra, geometry and have a fair command of the English lan- 
guage. If the boy can be kept in school until the end of his 
sixteenth year, this amount of training can be given to him. 
I believe that the value of this work has been underesti- 
mated. Technical education was introduced before manual 
training, and when the latter was first recognized it found place 
only in the high school. Gradually, grade by grade, it has crept 
down toward the kindergarten until in a few American cities, 
manual training is found in each of the twelve grades. The uni- 
versal introduction of such work into the public school system 
should be demanded by clear-sighted employers and labor lead- 
ers ; but in order that the young man may reap the benefits the 
school age must be raised. If the employer and the employe will 
unite on this proposition, it will mean much in the future. The 
interests of both are certainly harmonious in this instance. A 
well-trained class of workmen means the maintenance of indus- 
trial supremacy and the greater likelihood of peaceful relations 
between employer and employe. Ignorant, inefficient and 



TRAINING OF WORKERS 41 

sweated laborers are a menace to industrial growth and develop- 
ment.^ 

25. The money value of education. — Mr. J. M. 
Dodge of Philadelphia, in a noteworthy paper entitled 
"The Money Value of Technical Training," has com- 
puted the capital value of four classes of employes, each 
according to the amount of preliminary instruction which 
they have received. The first group he calls the un- 
skilled labor group, the second the shop trained 
or apprentice group, the third the group trained in trade 
schools, and the fourth, the group educated in the higher 
technical schools. The unskilled laborer, with but 
primitive training, works under the immediate super- 
vision of a boss and earns at the age of twenty-two 
$10.20 per week. This amount represents $530.40 a 
year, or capitalized at 5 per cent $10,608. This sum, 
then, $10,608, is the capital value of the unskilled la- 
borer; in other words, it represents the amount which 
he is worth to himself, and also to the community. 

The apprentice starts in at $3 per week, and is worth 
about $3,000 at the outset. At the age of twenty, he is 
earning $9 per week, and his worth amounts to 
$9,000. From the age of twenty to twenty-one and a 
half his pay is increased to $13.20 and his potential value 
to $13,200. At the age of twenty-four, he earns $15.80 
per week and his value is $15,800. In other words, in 
eight years, the capital value of the shop trained appren- 
tice has increased $12,800. 

The third group is composed of those young men who 
enter a trade school at sixteen years of age, and devote 
the next three years to acquiring a trade under com- 
petent instruction. At the age of nineteen, a trade 

1 Frank T. Carlton, " The Industrial Value of Manual Training." 



42 ECONOMICS 

school man enters the machine shop, and he can com- 
mand $12 per week, equal to the apprentice at twenty- 
one years of age. The three years at school have in- 
creased his value from $3,000 to $12,000, a gain of 
$9,000 ; thus he has caught up to the apprentice entering 
the shop at sixteen and who has been working for five 
years. Continuing the comparison, at the age of 
twenty-four the trade school graduate is earning $20 per 
week, with a potential value of $20,000 or $4,200 greater 
than that of the shop trained man. He increases his 
earnings up to $22 per week, a potential value of 
$22,000, and he does not, as a rule, go much further. 
The members of the third group are worth, therefore, 
on the average $6,200 more to themselves than the mem- 
bers of the apprentice group, solely as a result of their 
more thorough preliminary training. 

The fourth group is represented by a boy of sixteen 
who studies in a high school until his eighteenth year, 
preparing for admission to some technical institution, 
such as the Massachusetts Institute of Technology, 
Stevens Institute, or Cornell. Here, after four years 
of training, he is graduated at the age of twenty-two, 
ready to begin practical work. His wages at starting 
are $13 per week, or the same amount earned by the ap- 
prentice at the age of twenty-one and a half and by 
the trade school group at nineteen and a half. He 
has apparently lost by his six years of preparatory 
study, being six months behind the apprentice, and two 
and a half years behind the trade school graduate. The 
graduate of the technical school, however, increases his 
earnings very rapidly. Within six months his wages 
rise to $14 per week, and he reaches $15.80 per week 
nearly one year before the regular apprentice. In three 
years' time, the technical graduate earns $22 per week. 



TRAINING OF WORKERS 43 

surpassing the members of the trade school group, and 
his earnings continue to increase until at the age of 
thirty-two, ten years after entering upon his practical 
work, the technical school graduate earns $43 per week 
and his potential value is $43,000. Six years of 
preparation have enabled him to far outstrip the shop 
group and the trade school group. 

26. The place of mind in production. — The reason 
for the larger earnings of the trade school graduate, as 
Mr. Dodge explains it, illustrates the place of mind in 
production. Higher education, other things being 
equal, carries with it the ability to earn these large 
salaries, because these technically trained men are "di- 
recting and making it possible for large numbers of 
laborers, shop trained men, and trade school graduates 
to perform useful work. The draftsman at his board 
may never realize that as a result of his drawing a 
hundred men or more are given employment. His de- 
sign calling for structural steel, for example, could not 
be built were it not for the labor of many men employed 
in making and rolling the steel before it reaches the 
shop. Then comes the shop men to cut, punch and 
shear; then the erectors to assemble the structure in 
accordance with the original plan. For this ability and 
knowledge our technical man is paid." 

27. The importance of training for business. — Pre- 
liminary training is just as important in the field of 
business as it is in the field of technical industry. The 
average high school graduate is a more successful busi- 
ness man than the man whose education does not extend 
beyond the grammar grades. The graduate of a uni- 
versity is on the average far more efficient than the high 
school graduate. No matter into what branch of 
activity a young man proposes to enter, he will find it a 



44 ECONOMICS 

most excellent investment to spend money upon pre- 
liminary training. 

The man who succeeds in business must be first of all 
a man who can think, reason and plan. A man who 
knows merely the routine of a grocery or hardware store, 
"who knows how to keep a set of books, arrange a stock 
of goods, or make out and send a bill to a customer, has 
acquired useful information which will enable him to 
make perhaps $40 a month. But if this is all he 
possesses as an equipment for business, he cannot hope to 
win the highest success. Success in business means much 
more than a mere knowledge of routine. It implies, 
above everything else, the power to think independently 
in one's chosen field, the ability to answer such questions 
as these: If I am a butcher in a small town in Penn- 
sylvania, shall I accept an agency from Armour and 
Company, or shall I depend upon the surrounding 
country to furnish me with supplies? If I am a miller 
in Ohio, shall I introduce the roller process or stick to 
the old method? Or shall I change from steam to gas 
for my power plant? If I have men working for me, 
shall I pay them just the current rate of wages and work 
them as many hours as they will work, or will it be 
economy for me to shorten their hours? If I am a 
grocer, shall I deal in staples only, or put in a line of 
fancy goods? If I am a dry goods dealer, shall I take 
an agency for a catalogue house or fight the catalogue 
house with my small capital? These questions and 
others like them are constantly arising in every business 
man's experience. The men who succeed in business are 
the men who answer such questions correctly, and they 
are also tlie men who are able to reason and discriminate. 

Reasoning is, as its name implies, the act or process 
of finding out the reasons for things. The reasoner 



TRAINING OF WORKERS 45 

constantly asks himself: Why is this fact as it is in- 
stead of some other way? His punctuation is all ques- 
tion marks. He may care very little about the way to 
paint an iron bridge; he may never have a bridge to 
paint ; but he ought to be interested to know why an iron 
bridge should be painted at all, because if he and his 
fellow citizens are not informed, the neglect of some 
county commissioner may cost the taxpayers a new 
bridge. Possibly he cares very little how to make the 
contracts for stone and gravel for the country road ; but 
he should understand why a macadamized road is needed 
and why any but the best road is a waste of public money. 
How to do it is a lesson which must be learned differ- 
ently in every business establishment and which, if the 
learner is alert, he is not long in mastering. Why it 
should be done is a lesson far more important and far 
more difficult. 

28. Demand for university trained men in business. — 
Of recent years there has been in the United States a 
very considerable demand among members of the com- 
mercial community for university men. This applies 
particularly to men with a technical training, but it is 
expected of them that they shall be more than mere 
chemists, engineers, etc. Their education is to fit them 
for dealing with men and managing businesses. With 
a view to this end, they study economics, generally of a 
very practical kind ; the methods and policies of the large 
trusts, the organization of labor and its relation to indus- 
trial management, the modern problems of industrial 
finance, such as the advantages and disadvantages of 
issues of common or preferred stocks or bonds, the 
reasons for making improvements out of capital, or out 
of profits, and the negotiations for underwriting a new 
issue of stock or bonds. 



46 ECONOMICS 

Railroads, insurance companies, brokers and banking 
houses are among those who are anxious to employ col- 
lege men. Along some lines, the demands are so great 
that the universities cannot supply sufficient graduates. 
Thus the New York banking houses are anxious to 
obtain men with a good economic and statistical training 
to work in their investigation departments, which make 
very careful inquiries before the firms enter upon any 
scheme for underwriting the new stock and bond issues 
of any railroad or industrial concern. To meet this de- 
mand of the business world certain universities have 
introduced courses whose aim is to provide just such 
training. As an example a description may be given of 
a few of the evening lectures in the New York Univer- 
sity School of Commerce, Accounts and Finance. In 
the class in Business Organization and Statistics, a 
study is made under the guidance of a trained accountant 
of the internal management of a large business; the 
differentiation of the duties of the various departments, 
the advantages of various methods of organization as 
regards economy and the preservation of goodwill, 
trade-marks, local interests, etc. The course treats of 
the organization of corporations controlling different 
branches of industry, the relation of one branch to the 
others, and the relation of each to the parent company. 
In view of the complex character of modern commercial 
and industrial undertakings in America, a course of 
study along the lines indicated can be of great advantage 
to young men who are aspiring to managerial 
positions. 

29. Effect of machine industry upo7i labor. — Modern 
industry is machine industry. The principal work of 
skilled labor is in directing highly specialized machinery. 
It has been claimed that the effect of this narrow 



TRAINING OF WORKERS 47 

specialization upon the workman is injurious. There 
can be no question that this objection to machinery is to 
some extent well-founded. The man who works at one 
machine for twenty years must, in the nature of things, 
become likewise mechanical. To a large extent he loses 
the power of independent thinking and the power of 
initiative. On the other hand, the effect of machinery 
has been to increase so considerably the earnings of the 
working class that it is possible for them to obtain a 
thorough common school education, and in many cases, 
a high school education, before entering upon their 
work. This preliminary training will more .than offset 
the narrowing influences of subsequent specialization of 
their life work. 

Many large establishments, such, for example, as the 
Baldwin Locomotive Works of Philadelphia, have 
recognized the narrowing influence of extreme specializa- 
tion and have arranged for a system of apprenticeship 
by which young men can be given an all-round training 
in their shops, in order that they may be qualified to 
serve as bosses and foremen. Mr. S. M. Vauclain, 
superintendent of their enormous works, has described 
their apprenticeship system in substantially the follow- 
ing words : 

30. Apprentice system of Baldwin Locomotive 
Works. — The system as in vogue divides the apprentices 
into three classes : 

(a) First-class apprentices are required to have a 
good common-school education and are not to be over 
seventeen years and three months of age. They are 
indentured for four years; and are required to attend a 
free night school for at least two evenings in each week 
during the first three years of the apprenticeship. The 
first year the apprentice is expected to take up ele- 



48 ECONOMICS 

mentary algebra and geometry ; and the rudiments of 
mechanical drawing during the remainder of the two 
years. 

(b) Applications for indenture in the second class 
of apprentices are from boys who have an advanced 
grammar or high school training and who are not over 
eighteen years of age. The term for this class is three 
j^ears, and the apprentices are required to attend a night 
school which shall teach them the rudiments of me- 
chanical drawing for the first two years of indenture. 

(c) Third-class indenture ; this is in the form of an 
agreement .with young men of twenty-one years of age 
who are graduates of colleges, technical schools, or 
scientific institutions, having courses in the higher 
mathematics, natural science and drawing. They are 
not required to attend any night classes, but in lieu of 
this they must read some technical journal and turn in 
a synopsis of the articles. This matter is used for index- 
ing the articles in the publication. The indenture in each 
case places upon the firm the obligation to teach the ap- 
prentice thoroughly his art, and to furnish him abundant 
opportunity to acquire a practical knowledge of the busi- 
ness. The employer is also bound to retain the appren- 
tice in service until he has completed the term provided 
for in the indenture, with the reservation of the right to 
dismiss the apprentice for cause. 

The apprentices are changed every three months, and 
the first-year apprentice is given experience of such an 
extended character as to make him a first-class and 
thorough mechanic. At the end of his service he is 
given a bonus of $125; he is then at liberty to 
sever his connection with the works and has the means of 
traveling lialf-way across the continent in search of a job 
satisfactory to him. 



TRAINING OF WORKERS 49 

The course for the first-class apprentices is designed to 
develop first-class mechanics, and men for all positions 
of minor responsibility; the object of the course for the 
second class is to develop men for the positions of con- 
tractors and sub-foremen. The assistant foremen, fore- 
men and executive staff, are developed from the third 
class of apprentices, although no limitation is placed 
upon the height to which the members of any class of ap- 
prentices may aspire or rise, and the first class of appren- 
tices may, and in some cases, do rise to places of higher 
responsibility thai; those held by the third class. 

31. Training sliop superintendents. — It is very essen- 
tial that men holding positions of responsibility should 
acquire a habit of making observations and keeping a 
record of them, and in this manner develop habits which 
will prove very valuable to them when asked to look after 
the work of several men or the material required for a 
gang or shop. 

In order to systematize this work, a form is provided 
for the second and third classes of apprentices which 
each is required to fill in. This form contains all the 
data necessary to establish piece-work prices ; the better 
class of apprentices are thus organized into an ele- 
mentary rate fixing department, and information is 
secured from which can be obtained a very accurate 
estimate of the cost of labor or of any piece of work. 
The superintendent of apprentices also secures a very 
accurate estimate of the cost of labor on any piece of 
work. The superintendent of apprentices also secures 
a knowledge of the work being done by each apprentice 
and a means for comparing the work of the different ap- 
prentices. Says a well-known writer : 

The management carefully guards against any tendency to- 
wards paternalism, in an effort to bring out the individual 
1—4 



50 ECONOMICS 

qualities of the apprentices and with the behef that the ap- 
prentices will develop into better and stronger men if they are 
compelled to rely upon their own resources. There are no spe- 
cial lectures and no clubs or social features ; the blue overalls 
level all social distinctions ; princes and sons of men of wealth 
work shoulder to shoulder with those less favored, and it is such 
an every-day experience as to call for no comment. 

It will also be seen that the plan is not altogether a philan- 
thropic one, for the incorporation of the several features men- 
tioned before make the system self-supporting. The chief ad- 
vantage, however, is the development of a loyal, brainy set of 
men with a thorough training in the mechanic arts and espe- 
cially developed in certain lines. Those of them that remain 
will lend their energy to assisting and building up the business 
of their employers and are just as proud of the works and its 
accomplishments and just as jealous of its reputation as the 
proprietors themselves, for they consider themselves the children 
of the works. The m'anufacturing plant that has a loyal, in- 
telligent body of workmen who make their employer's interest 
their own, has the very best equipment for meeting the strenuous 
competition of the present day. In order that a manufacturer 
may manufacture goods more cheaply than his competitor, he 
must have men in his employ of the best intellect, of the greatest 
industry and persistence, and loyal to him and to the business he 
represents. 

32. Importance of moral efficiency. — Ambition, per- 
severance and honesty depend upon both heredity and 
environment, primarily upon the latter. The quality of 
lionesty among workmen ought to be far more common 
than it is. The faithful workman among unskilled la- 
borers is rare. The average unskilled laborer will steal 
time from his employer wherever possible. He takes 
no interest in doing his work well, and although he would 
not steal money or break into a house, in his business re- 
lations with his employer, to whom he is bound to give 



TRAINING OF WORKERS 51 

faithful service, he is essentially dishonest. It has been 
found, however, that fidelity among workmen increases 
as their skill and intelligence increase, and their pre- 
liminary education has, therefore, a most important bear- 
ing upon the honesty with which they perform their 
work. 

Ambition and perseverance, far more than honesty, 
depend upon environment. Where the constitution of 
society allows the workman but a small share of what he 
produces, so that the yield of his labor is only sufficient 
to provide the barest necessities, and where it is difficult 
for a man to rise into a higher station than that in which 
he was born, ambition has no chance to develop, and 
perseverance extends only to procuring the necessities 
of life. An illustration of this is furnished by the effect 
of residence in the United States upon certain classes of 
immigrants. The Italian and other peasantry, who are 
ground down at home by high taxes and military service, 
and whose wages, even without these deductions, arc; 
low enough, have no inducement to better their condi- 
tion because they know that it is impossible. These peo- 
ple, however, in the United States where they are favored 
by just laws, are paid higher wages and are secured in 
the fruits of their labor, develop great energy and ambi- 
tion. Many of them have accumulated large amounts 
of property and risen to positions of honor and influence. 



CHAPTER VI 

WOMAN AND CHILD LABOR 

33. The labor of women and children. — The labor of 
women and children is economical only because it is 
cheap. This labor supplements the labor of men, and it 
is therefore valued at a lower rate. Female and child 
labor is mechanically less efficient but this is no bar to 
its employment since mechanical skill is of decreasing 
importance, owing to the increasing use of automatic 
machinery, which performs complicated operations with 
great accuracy and merely requires watching and tend- 
ing. The labor of women and children is particularly 
important in the textile industries, where the use of au- 
tomatic machines is so extensive. 

According to the census of 1910 the number of per- 
sons under the age of sixteen employed in the manu- 
facturing industries of the United States was 161,493 
and in mining, 8,151. Probably several times the total 
for manufacturing and mining were employed in agri- 
cultural pursuits, in domestic and professional service, 
and in trade and transportation, but the figures have 
not been made available. There has been a great im- 
provement in conditions since the census of 1900. 

The child labor problem has assumed a particularly 
acute form in the South, where a large number of "poor 
whites" from the hills have gone down into the districts 
controlled by the newly erected cotton mills, and the 
whole family has gone into the mill, with the exception 
of the father who in some cases, carries the dinner pails 

52 



WOMAN AND CHILD LABOR 53 

to the children and draws the pay for the family on Sat- 
urday night. 

It is generally conceded that the effect of factory 
work on the average child under fourteen or fifteen years 
is bad. In the first place, we have come to believe that 
in order to be an efficient member of society, every per- 
son should receive at least a minimum amount of educa- 
tion. The child who stops school at an early age, goes 
into the factory and works for long hours at some mo- 
notonous task, not only does not learn, but actually for- 
gets what little knowledge he was able to secure before 
going to work. 

34. Moral and physical effects of child labor. — The 
effect of the moral atmsophere of the factory upon the 
average child is a question that has been vigorously dis- 
cussed from both sides. There can be no denying the 
fact, however, that a child of tender years who is placed 
in contact with grown men and women of all kinds is in 
a position to learn much that would not be learned from 
either school companions, school teachers, or members 
of the family at home. The resulting effect upon the 
child's morals is likely to be bad. 

The effect of factory work on the physical make-up 
of a growing child is apparent. The natural tendency 
of the child is to play. It is through play that children 
develop both mentally and physically. Play involves 
a change of occupation at the will of the person who 
is playing. In contrast with this activity, the essential 
thing about modern factory work is that it is monot- 
onous, long continued, and continued at the will not of 
the worker, but of the boss or foreman. The child in 
the factory is given mechanical things to do because of 
his lack of skill and ability to do better things. For 
example, he may turn in the edges of a box cover, tie 



54 ECONOMICS 

a broken thread on a spinning frame, sort out pieces 
of iron to be made into bolts, or a thousand other mechan- 
ical operations which form a part of modern factory 
work. The child who is compelled to do one thing for a 
thousand or five thousand times a day, day after day, 
week after week, does not grow and develop either men- 
tally or physically, but is stunted in both directions. 

In short, it is fair to say that the child who is working 
is, as a rule, not developing intellectually, may be de- 
graded morally, and is apt to be stunted physically. The 
maintenance of an efficient labor force in the community 
requires a development in each person of mental, moral 
and physical traits, and from the standpoint of society, 
we cannot afford to continue a system which, by working 
a child at an early age, renders him a less efficient pro- 
ducer for the rest of his life. 

35. Indirect effects of cJiild labor. — Aside from the 
effect of factory work, it is interesting to note that child 
labor means, for the time being, at least, a decrease in 
the amount of labor which may be had by adults. For 
example, in England before the factory system began, 
men of skill and ability were required to do the spinning 
and weaving. The moment an invention was perfected 
which enabled a machine to do most of the work, which 
merely required mechanical attention to see that the 
threads did not break, it became possible to dispense 
with the skilled man and employ an unskilled child. In 
other words, labor-saving machinery tended by children 
results in depriving adults of their places in this particu- 
lar occupation. A well-known illustration is given of a 
shoemaker in Massachusetts who was working in a fac- 
tory for $2 a day. A machine was invented and put in 
operation which did the work, and this man was dis- 



WOMAN AND CHILD LABOR 55 

missed and his son of fifteen employed at $1 a day to 
tend the machine. 

The effect of child labor on family life, and there- 
fore on the social structure, is, to say the least, detri- 
mental. This is particularly true of girls from twelve 
to fourteen who go to work in factories, and from that 
time till they are married are employed in factory work 
from nine to eleven hours per day. They have no op- 
portunity of learning home duties, and when the time 
comes for them to marry, they will be less efficient house- 
wives and home makers than if they had secured, either 
at school or at home, some training that would prepare 
them for their lives as wives and mothers. 

36. Child labor inefficient and uneconomical. — It is 
interesting to note that child labor is always more preva- 
lent in new industries and in new communities which for 
the first time are developing industries. In old com- 
munities, manufacturers, as a rule, refuse to employ 
children under fourteen and often under sixteen, on the 
ground that a child under sixteen is so unintelligent, 
irresponsible, and reckless that it is apt to waste more 
than it makes. Such a child is so inefficient that a man 
at twice the salary can produce far more than twice the 
product. It is a well-known fact that goods manufac- 
tured in the South, where child labor is prevalent, be- 
cause of their inferior quality, bring lower prices in the 
market than goods manufactured in the communities 
where there is not so much child labor employed. The 
community is very generally coming to believe that child 
labor is not only cheap labor so far as wages are con- 
cerned, but that it results in a cheap product — cheap both 
in price and in quality. 

Fi'om a national standpoint, therefore, the employ- 



56 ECONOMICS 

meiit of small children to do the work of the world is a 
mistake because it inevitably leads to a depreciation in 
the quality and character of the laboring force of the 
community; first, because it impairs the ability of the 
child; second, because of its effect upon the home and 
social life; third, because it affects adversely the wages 
of adult labor; fourth, because it results in a poorer 
product. From every standpoint, child labor is detri- 
mental and should be strictly suppressed in the interest 
of the coming generations. 

37. Women in industry. — In 1900 there were about 
5,000,000 women working in gainful occupations in the 
United States. The census figures of 1910 report in 
manufacturing industries 1,290,389 female employes. 
About one-sixth of those gainfully employed are 
women and there is no important branch of industry in 
which they are not engaged. 

The effects of the entrance of women into industry 
have been variously estimated, but the causes are obvious. 
In the fii'st place, the development of modern industry 
has permitted a minute subdivision of labor which gives 
each person in an industry a very small and definite op- 
eration to perform. For example, a girl may paste cor- 
ners on paper boxes, or watch a spinning frame to see 
tliat the threads do not break. These operations are 
largely mechanical, and require speed and dexterity 
rather than mechanical ingenuity. In the modern fac- 
tory, a regular machinist is employed to see that the 
machines are in good condition and running properly, 
while the operating of each machine is done by one who 
knows nothing of its mechanism, but who has mastered 
the art of tending to the needs of that particular ma- 
chine. The operator may sew one seam on a pair of 
overalls, or put buttons on a coat, or stamp out pieces 



WOMAN AND CHILD LABOR 57 

of paper to make Christmas cards, or do any one of a 
thousand things, each of which is simple, and to be 
learned in a short time. A girl of sixteen or eighteen 
can go to a factory, and in a few days learn to manage 
a machine without having any previous training or ap- 
prenticeship. To be sure, her efficiency will not be high 
during the first few months, but she can at least make a 
living at the work. 

In the second place, this minute subdivision of labor 
permits of what is known as the standardization of in- 
dustry. Each of these small operations becomes fixed 
or standardized. No experience is required to manage 
a certain machine; the work can be learned in a short 
time, and anybody with a small amount of training can 
carry on this part of a productive operation. It is not 
necessary to keep the same person at work on the same 
machine, for so long as the machine is kept going, pro- 
duction continues. That is, production depends not 
upon the individuality of the worker, but rather upon 
the continued operation of a standard machine. 

38. Women s wages lower than mens, — The third 
reason for the entrance of women into industry is the 
possibility of their working considerably cheaper than 
men. A man in industry requires a wage sufficient to 
maintain himself and his family, whereas many women 
living at home, with little or nothing to do, are willing 
to go into industry in order to secure spending money 
or enough money to guarantee them the little necessi- 
ties and luxuries of life that a young woman naturally 
desires. As a rule, these women are single, have no one 
dependent on them and in many cases can secure their 
living at home. Thus they are willing to work for fifty 
or seventy-five cents or a dollar a day, whereas a man 
cannot support a family and work in the same industry 



58 ECONOMICS 

for less than $2 a day. In consequence women are em- 
ployed and men leave the industry. This is particularly 
true in such an industry as cigar-making, which requires 
dexterity rather than strength. Cigars which were 
formerly rolled by men for seventy-five cents or eighty 
cents a hundred are now rolled in some factories by girls 
for thirty-five or forty cents. Men are forced out of 
the industry because they canot afford to work at such 
low wages, whereas girls, ranging in age from sixteen 
up, are very willing to receive $3 or $4 a week for their 
efforts. 

Had labor not been subdivided and industry stand- 
ardized, women would have found it difficult to enter 
many industries; but with the development of machinery 
leaving to the worker only quick, mechanical movements 
to perform, women are often more desirable than men 
because of their greater dexterity and quickness. 

39. Women in factory industry. — From the stand- 
point of industr}^ these are the prime causes leading 
women to take up industrial pursuits, but one of the 
chief things that has led young women staying at home 
to go into industry has been the fact that nearly all of 
the industries which were formerly carried on at home 
are now carried on in factories on a large scale. Spin- 
ning and weaving and the manufacture of clothing were 
the first things to leave the home. Although in some 
mountainous districts, of the South clothing is still spun 
and made up at home, the great majority of people in 
the United States to-day wear factorj^-made cloth and 
clothing. A hundred years ago factory -made cloth and 
clothing were the exception and not the rule. 

The changing of spinning and weaving from a home 
industry to a factory industry meant that all pei'sons 
who were engaged in these industries must move into 



WOMAN AND CHILD LABOR 59 

towns, because only in towns could a factory system be 
carried on when the transportation was as defective as 
it was in the early part of the 19th century. This mov- 
ing into towns meant that people would no longer be able 
to keep chickens and cows and the women of the house- 
hold were therefore deprived of another occupation, 
namely, tending the chickens and cows and taking care 
of the milk and making butter. 

Then the manufacture of underclothing and stockings 
was undertaken in factories with exactly the same result. 
People, instead of engaging in these occupations at 
home, bought the factory-made goods because they were 
cheap. At the same time, in order to buy factory -made 
articles, they moved to town to secure employment in 
the factories. Thus the making of clothing in factories 
instead of at home removed from the women of the 
household a great group of occupations which had 
formerly taken up a large part of their time. 

Within the past twenty years, the preparation of food 
stuffs, another great group of consumption goods, has 
been relegated to the factory. Until recent years, bread 
was baked at home. Now one bread company located 
in a city, for example, Buffalo, sends bread to small 
towns two hundred miles away. Meat was formerly 
killed and dressed at home. It is now killed in the 
Middle West and delivered dressed to all parts of the 
world. Most households no longer make their own soap, 
but buy the product ready made. The same is true of 
canned fruit and vegetables. Successful factory proc- 
esses have been devised by which they are prepared in 
factories and shipped far and wide to the consumer. 
Cakes, cookies and crackers and breakfast foods are also 
prepared in factories and shipped to all parts of the 
country "pre-digested" and ready to eat. 



60 ECONOMICS 

Thus of the three occupations, sewing, cooking and 
cleaning which women formerly performed at home, 
two, sewing and cooking, are carried on in the factories, 
while the cleaning still remains a problem. Much of 
this, however, has been shifted to the laundry and auto- 
matic carpet-cleaning companies, and within a genera- 
tion woman will be deprived of practically every 
occupation which was formerly considered to be in her 
home sphere. Therefore, when a girl finishes her 
schooling there is no possibility for her to engage in 
any occupation at home, and she naturally follows the 
occupations which have left the home and gone to the 
factory, 

A minute subdivision of labor and a standardization 
of industry have made it possible for women to enter 
industry; the wish to supplement the family income or 
the necessity for so doing, and the absence of home em- 
ployments, due to the replacement of home industry by 
factory industry, have made the woman desirous of 
entering industry; and these two causes, working side 
by side with the possibility of woman's working cheaply 
and the superior ability of women to carry on stand- 
ardized industry have led to the great rush of women 
into gainful occupations. 

40. The problem of women in industry — argument 
against. — 1. Woman is the home maker and she should 
perform that function and no other, as it is not possible 
for any one to do two things well at the same time. 

2. Children can be brought up properly only when 
subject to the constant care of the mother, and this can- 
not be given if the mother is working a large part of 
her time in an occupation apart from the home. 

3. Factory labor injures women much more than it 
injures men. Women are so constituted physically that 



WOMAN AND CHILD LABOR 61 

long standing or arduous work is apt to result seriously. 

4. The work of women results in cutting down the 
wages of men. 

5. The working of married women has a serious effect 
on the coming generation of children. 

41. Arguments in favor of women s labor. — On the 
other hand, those in favor of women engaging in in- 
dustry maintain that — 

1. There is little left for a woman to do at home, and 
that as it is bad to be idle, it logically follows that she 
should go into the f actorJ^ 

2. A woman working at home is working all the 
time, whereas if she engages in factory work her hours 
are definite and limited. 

3. Women do not care for children all of the time 
even when they remain at home, because of the fact that 
the children are in school during a large part of the day. 

4. With our standardized industry, the physiological 
differences between man and woman need play no part 
in the controversy, because the continuance of a given 
operation does not require the constant presence of one 
operator, but may be carried on one week by one person 
and the next week by another. 

5. The entrance of women into industry makes them 
independent. Heretofore, women in poorer and larger 
families were compelled to get married in order to 
relieve their fathers of the burden of taking care of 
them. The results of such forced marriages were in 
many cases unhappiness and misery. Under the new 
system, women as independent wage earners can ac- 
tually assist their father in taking care of the home, and 
need marry only when they find a congenial person. 

6. The entrance of women into industry places 
women and men on an equality, whereas under the old 



62 ECONOMICS 

system, man alone earned a livelihood and women were 
constantly subjected to the disagreeable necessity of ask- 
ing the men for money. The placing of women and 
men on an equality means democracy in its highest form, 
because in a democracy there are no superiors and no 
inferiors. This development of women will mean a 
higher standard of children — children of more character 
and independence. 

7. It is not fair, when the work of the world is done 
so largely by machines, to require the women to do the 
drudgery. It is not necessary to banish her to the tub, 
the needle and the hot stove, while man engages in more 
interesting and enjoyable pursuits. 

8. Women are needed in industry because they can 
there produce far more than they could at home. In 
modern standardized industry, women are often more 
skilled and therefore more productive than men, because 
the heavy work is all done by machinery and only 
dexterity and skill are required. Women often possess 
these qualities to a higher degree than men, and besides, 
women as a whole are steadier and more reliable workers. 
All modern inventions and improvements tend to place 
women on a level with men and give them the same 
advantages in the industrial world. 

The controversy is not yet ended, and each person is at 
liberty to draw his own conclusions. Without ques- 
tioning the validity of the arguments on either side, it 
is undoubtedly true that more women are going into in- 
dustry every year because of the possibilities which mod- 
ern industry presents to them to become effective earners, 
and because of the necessity of having some occupation. 
Unquestionably women are in industry to stay. The 
problem of society is so to mold industry that it may not 
injure the women who engage in it. 



CHAPTER VII 

CAPITAL 

42. Primitive man compared with civilized man. — 
Nature and labor are the primary elements in produc- 
tion. All the wealth of the world has been produced 
by the cooperation of these two factors. We have, 
however, merely to look about us in order to discover 
that man unaided can make use of none of the abundant 
materials and mighty forces by which he is surrounded. 

There is no more helpless object than a man turned 
adrift in a wilderness without tools or weapons and left 
to find his subsistence. He is unable to secure any 
vegetable food except nuts, wild fruits and berries. 
Animal food, even if he were strong enough to catch 
and kill it, he cannot eat uncooked, and he has no fire. 
He requires clothing to cover him, and clothing is not 
to be had. For shelter, he must dispute with the beasts 
for the caves and burrows in which he will, moreover, 
soon perish from cold or wet. In a word, man placed on 
a level with the beasts, left to work out his salvation 
with tooth and claw, is in a hopeless plight. In a state 
of nature, if such a state ever existed, his situation is 
indeed deplorable. The miserable condition of the 
lowest tribes of savages, such as the Bushmen of South 
Africa, or the natives of Australia, show how narrow 
is the remove from man in a state of nature and the 
beasts of the field. 

From man as we have pictured him, to man as he is, 
is a great distance. The lord of creation, master of the 

63 



64 ECONOMICS 

earth and the sea, with all things put under his feet; 
there is little resemblance between the two pictures. 
Civilized man draws upon every part of the earth for 
his subsistence. Upon his breakfast table appear the 
contributions of every clime. His clothing and housing 
enable him to live in comfort in a climate in which he 
would otherwise soon perish. Instead of spending his 
entire time and energies from early childhood in the 
struggle for the means of subsistence, one-fourth of his 
active life is usually unproductive, being spent under 
the care of his parents or at school, and much of the re- 
mainder is given to recreation. His whole existence is 
artificial. His food is prepared for him, and bears little 
or no resemblance to its original elements. His clothing 
transforms his appearance. He passes his life in a 
world of which his early ancestors knew nothing. By 
the telegraph and telephone he has annihilated space for 
purposes of communication and by the steamship and the 
railway he has reduced the world to one-tenth of its orig- 
inal size. It is necessary that we should fix this compari- 
son carefully in our minds, for the great gulf which it 
presents between man in a state of nature and man as 
we find him in modern society, has been spanned by the 
use of capital. 

43. Capital defined. — Capital may be defined as the 
sum of the machinery and materials of production. 
The goods which we are consuming and those which we 
expect to consume make up only a small part of the 
total mass of material wealth. This is quickly seen by 
a survey of the following table taken from a volume 
entitled "Wealth, Debt and Taxation," published by 
the United States Census Bureau. It gives what is 
doubtless the most accurate and careful estimate ever 
made of the total wealth of the United States. The 



CAPITAL 65 

estimate is made for the year 1900 and the year 1904. 
In the former year the total value of all property in the 
United States is set at $88,500,000,000. In the latter 
year the total was $107,000,000,000. The census esti- 
mate of 1904 classes the total wealth of the United States 
as follows : 

Real property and improvements $62,340,000,000 

Live stock 4,074,000,000 

Farm implements and machinery 845,000,000 

Manufacturing machinery, tools and implements 3,300,000,000 

Gold and silver coin and bullion 2,000,000,000 

Railroads and their equipment 11,245,000,000 

Street railways, shipping, water works, electric light and 
power systems, telegraph and telephone systems and 

canals 4,841,000,000 

All other property — products of agriculture, manufactures 
and mines, merchandise, clothing, furniture and miscel- 
laneous personal property 18,462,000,000 

No more than one-tenth of the property of the 
United States is represented by goods ready for 
consumption — "consumption goods" so called. The 
remainder is made up of "capital goods," goods 
used for purposes of further production. In this 
class are included, as we have just seen, the farms 
with all their equipment of buildings and machinery, 
the mines, quarries and oil wells, the thousands of fac- 
tories filled with machinery of all sorts, the 246,000 
miles of railway, and the thousands of steamships and 
sailing vessels, all the buildings in towns and cities which 
are used for productive purposes, the money by which 
exchanges are effected, and finally every kind of raw 
material from ore, logs and wool to pig iron, planed 
lumber and cloth. 

44. The service of capital in 'production. — The service 
of capital in production is to enable men to utilize the 
forces and properties of nature, to make nature ac- 

1—5 



66 ECONOMICS 

complish for them what they could not accompHsh for 
themselves. To this end, they must, as it were, capture 
these forces and compel them to do their bidding*. 

A peasant requires drinking water. The spring is some dis- 
tance from his house. There are various ways in which he may 
supply his daily wants. First, he may go to the spring each 
time he is thirsty, and drink out of his hollowed hand. Tliis is 
the most direct way ; satisfaction follows immediately on exertion. 
But it is an inconvenient way, for oiu' peasant has to take his 
way to the spring as often as he is thirsty. And it is an in- 
sufficient way, for he can never collect and store any great quan- 
tity such as he rec^uires for various other purposes. Second, 
he may take a log of wood, hollow it out into a kind of pail, 
and carry his day's supply from the spring to his cottage. The 
advantage is obvious, but it necessitates a roundabout way of 
considerable length. The man nmst spend perhaps, a day in 
cutting out the pail ; before doing so he must have felled a tree 
in the forest ; to do this again, he nmst have an axe, and so on. 
But there is still a third way, instead of felling one tree he fells 
a number of trees, splits and hollows them, lays them end for 
end, and so constructs a runnel or rhone which brings a full 
head of water to his cottage. Here, obviously, between the ex- 
penditure of the labor and the obtaining of the water, we have 
a very roundabout way, but, then the result is ever so much 
greater. Our peasant need no longer take his weary way from 
the house to the well with the heavy pail on his shoulder, and 
yet he has a constant and full supply of the freshest water at his 
very door. 

Another example. I require stone for building a house. 
There is a rich vein of excellent sandstone in a neighboring hill. 
How is it to be got at? First, I may work the loose stone back 
and forth with my bare fingers and break off what can be broken 
off. This is the most direct, but also the least productive way. 
Second, I may take a piece of iron, make a hammer and chisel 
out of it, and use them on the hard stone — a roundabout wav 
which, of course, leads to a very much better result than the 



CAPITAL 67 

former. Third method — having a hammer and chisel I use 
them to drill a hole in the rock ; next I turn my attention to pro- 
ducing charcoal, sulphur and nitre, by mixing them in a pow- 
der, then I pour the powder into the hole, and the explosion 
that follows splits the stone into convenient pieces — still more 
of a roundabout way, but one which, as experience shows, is as 
nnich superior to the second way in result as the second was to 
the first. ^ 

These simple illustrations show the nature of the 
service which- capital performs in industry. It places 
the forces of nature and the properties of matter at the 
service of man. In the example first given, the im- 
penetrability of wood to water was utilized, and also the 
force of gravitationo The peasant by making his bucket 
and constructing his trough captured, as it were, this 
property and this force and compelled them to serve 
him. In the second illustration, the hardness of iron was 
utilized and also the explosive force of powder. These 
properties of matter became the servants of man. This 
condition of affairs is characteristic of all modern capi- 
talistic production. 

A steam engine is built to utilize the expansive force 
of steam for the purpose of transforming and trans- 
porting commodities. This power is transmitted by 
means of shafting, pulley wheels and belts to a machine 
tool, such as a planer. In this machine, the hardness of 
steel in the cutting tool is combined with the power 
of steam to shape and place cast iron as easily as a car- 
penter planes a soft pine board. Here then is another 
case of harnessing natural forces to do work which man 
could not do for himself. 

^ 45. Ccqntalistic production is indirect. — Capitalistic 
production is indirect or roundabout. Its efficiency in- 

1: Bohm-Bawerk, " Positive Theory of Capital," pp. 18-19. 



68 ECONOMICS 

creases with its indirection. A savage is hungry. He 
repairs to the shore and gathers shellfish. That is direct 
production. He satisfies his immediate wants. An- 
other man, higher in the scale of intelligence, collects 
hy hard labor enough fish to give him subsistence for 
some days. This time he employs in making a canoe 
and weaving a net. With these appliances, he is able 
with comparatively little effort, not merely to supply 
his own wants for food, but to obtain a large surplus of 
fish which he may exchange for skins or weapons which 
he desires. The first man employed the direct method 
of production, the second, the indirect. The first went 
to the shore and satisfied his hunger ; the second engaged 
in a totally distinct set of operations, apparently dis- 
connected with fish or fishing, with the result that he 
became a far better fisherman than his more simple- 
minded fellow. 

The superiority of capitalistic over direct production and 
the reasons for it will "appear clearly from a few illustrations. 
One of the most urgent needs of a pioneer in a new country is 
for fresh water. Having found a spring he may gratify this 
need by scooping up the water with his hands. This will be 
direct production. Or he may make a cup in which he can 
dip up, by stooping once, all of the water he can drink. Such 
a cup will be a capital good and the process will be capitalistic 
production. It will multiply largely the return resulting from 
the effort of stooping. Or he may fashion a larger vessel In 
addition to his cup with which he can dip up at one time all 
of the water he requires for a whole day. This will be more 
highly capitalistic production. Or, finally, If the spring hap- 
pens to be at a higher level than his cabin, he may construct a 
trough of hollowed logs capable of conducting the water from 
Its source to his ver}'^ door. This will be much more highly capi- 
talistic production than either of the other processes, and its 
return will be correspondingly larger. The force of gravity 



CAPITAL 69 

will now relieve him entirely of the task of carrying the water, 
and all that he will need to do to secure an abundant supply will 
be to keep his trough in repair.^ 

46. Illustration^ of indirect methods in production — 
Fishing. — To go a step further. Suppose a civilized 
man wishes to fish on a commercial scale. He has built 
for him a steam vessel, with an elaborate equipment of 
nets and seines. He lays in a store of provisions, 
enough to last a month or more. He provides facilities 
for curing, salting and packing the fish taken. He 
hires a crew. Then he is ready for fishing. The first 
operation requires an hour ; the result is a few poor shell- 
fish. The second requires perhaps two weeks, and the 
result is a boatload, perhaps 150 pounds, of the fish that 
can be taken close off shore. The third requires six 
months, besides a number of extended series of opera- 
tions in constructing the machinery with the aid of 
which the vessel is built and equipped. The result is a 
hundred tons of deep sea fish. At each step, the pro- 
ductive process grows more indirect, more roundabout 
and circuitous, but at the same time more efiicient. 

47. An illustration of capitalistic production — in- 
crease of flour tirade to China. — Consider finally an ex- 
treme illustration of the law whose operation we are 
here considering. Let us assume that the president of 
the Great Northern Railway desires to increase the 
sale of American flour in China, To this end, he has 
first to extend his lines into Manitoba to bring down to 
Minneapolis the wheat of the Red River Valley. He 
places a large order for rails with the Carnegie Steel 
Companj^ of Pittsburgh, another order for locomotives 
with the Baldwin Locomotive Works of Philadelphia, 
and an order for box cars with the American Car and 

iH. R. Seager, "Economics: Briefer Course," p. 79. 



70 ECONOMICS 

Foundry Company. He also orders built two steam- 
shij)s specially designed for this trade. 

This succession of orders stimulates activity in the 
iron and steel trade. An enormous quantity of iron is 
wanted for these various purposes. The production of 
iron ore on the Mesaba Range is increased, new vessels 
are put into service to carry the ore to Conneaut, a port 
at the foot of Lake Erie, and new cars and locomotives 
are transferred to the Pittsburgh Bessemer and Lake 
Erie Railroad to take this ore to Pittsburgh. Similar 
activity is visible in the coke region. Work on a new 
blast furnace which the Carnegie Company is building 
is rushed to completion. The fresh supplies of material 
are quickly converted into iron; a part of this iron is 
turned into steel rails and shipped north, another part 
into billets, bars, plates and sheets and sold to the car, 
locomotive and shipbuilding works. 

Meanwhile, as the rails are received in Manitoba, a 
force of men are laying the new line. By the time a 
hundred miles has been constructed, the equipment is 
ready and the service has been started. JNIcanwhile, also, 
the immigration agents of the Great Northern have been 
busy publishing the advantages of the new region to be 
opened. As a result of their efforts, a rush of popula- 
tion follows the railroad, and the settlement of tlie 
territory creates a demand for lumber, live stock, agri- 
cultural implements, furniture, and provisions, stimu- 
lating the activity of the industries which produce these 
commodities. Within a year, a large crop of wheat is 
harvested, carried to 3Iinneapolis and ground into flour, 
which is then shipped to Seattle to be loaded into the new 
vessels which have by this time been completed. 
Finally, after two years of pre])aration, the flour wliich 
was the object of all this preparation is landed in Cliina, 



CAPITAL ri 

its destination from the beginning. This illustration 
shows the essential character of the capitalistic system 
of production as being roundabout and indirect. In 
order to produce fifty thousand tons of flour a long series 
of preliminary operations were necessary, most of which 
were indirectly related to flour production, but which all 
contributed in one way and another to this result. With 
the resources for wheat production existing before the 
extension of the railroad was inaugurated, the new de- 
mand for flour could not have been supplied. If the 
demand had been onty for a few thousand barrels, no 
increase in equipment would have been needed. To fill 
a large order, however, the circuitous path which we 
have traced must be followed, in order to make a new 
draft upon the great reservoir of productive power in the 
northwest. 

48. Saving defined. — We may define the process of 
the creation of capital as saving. As commonly under- 
stood, saving consists in putting away money in a bank. 
In fact, however, this deposit of money is only a means 
to the end of the production of capital goods. Ignor- 
ing, as we may, at this stage of our discussion, all con- 
sideration of the function of the savings institution in 
promoting the production of capital goods, we may 
point out that since the object of saving is to obtain an 
income, this project can be achieved only by increasing 
the production of consumable goods, which in turn, as 
we have seen, necessitates the production of capital 
goods. This production of capital goods conserves or 
saves energy in a form in which it becomes available for 
the future satisfaction of human wants. We repeat, 
therefore, that saving is the production of capital or in- 
termediate goods. 

49. Illustration of saving. — When a railroad increases 



72 ECONOMICS 

the number of its cars, locomotives or miles of track, it is 
saving in the sense in which we are here using the term. 
This often involves large amounts in a single year. The 
amount of saving thus done depends largely on the finan- 
cial condition of the country. In years of prosperity, 
railroads will extend their lines and add new cars. In 
years of depression, these expenses are immediately cur- 
tailed. However, a railroad in a healthy condition in 
normal times makes steady additions from year to year 
to its physical equipment. This is well illustrated in the 
accompanying table which shows the increase made in the 
number of locomotives, cars and trackage of the Penn- 
sylvania Railroad system during the period 1904-1907. 

1904 1910 1912 

Number of locomotives 5,327 6,8G0 7,101 

Number of passenger cars 5,181 5,831 6,097 

Number of freight cars 210,970 263,039 267,594 

Miles of tracks 21,157 24,416 25,494 

50. Necessity of saving. — A large amount of saving 
is necessitated, not merely by the destruction of materials 
in production, but by the deterioration of industrial 
plants, the exhaustion of soils and the destruction of 
forests. The productive equipment of society is con- 
stantly wearing out, and this must be replaced if the 
output of consumable goods, the end and aim of all 
productive activity, is not to be diminished. 

51. Maintenance of plant saving. — One of the most 
interesting forms of saving is that involved in the 
maintenance of capital. This too is well illustrated in 
the history of every railroad. Two of the most im- 
portant expense accounts on the books of all railroads 
are: (1) Maintenance of way and structure. (2) 
Maintenance of equipment. The principle underljang 
maintenance is that the property should be in as good 



CAPITAL 73 

pnysical condition at the end of the year as it was at 
the beginning. A machine or a factory building may 
have a definite term of usefulness. This fact is recog- 
nized in the depreciation account which the owner carries 
on his books. A railway, on the other hand, is prac- 
tically a permanent property upon which it is not 
customary or practicable to compute depreciation. A 
railway track in all its parts, is non-removable. It is 
a permanent structure and as such must be maintained 
in the highest state of efficiency in order to be effective. 
This is such a paramount necessity, that any railway 
company which does not spend generous sums upon 
maintenance of the permanent roadway, and upon im- 
provements thereof, will soon find the operation of the 
road unduly expensive and dangerous. 

FJrst, let us look at the roadway itself. From the 
very first day that operation begins there must be spent 
large sums for strengthening the roadbed. Heavy 
rains, melting snow and sliding banks necessitate large 
expenditures for additional culverts, for larger drains, 
for ditching and for stone retaining walls, while the 
expense of heavy rock ballasting appears to be almost 
without end. There is always something to be done in 
straightening out curves, reducing grades, filling in soft 
places, draining the right of way and ofttimes part of 
the surrounding country, all of which must be paid for 
out of the earnings. 

Then the bridges and trestles, hastily built in con- 
struction days, require strengthening with additional 
timbers as well as new sills, caps, posts, and stringers 
for replacement of rotten or defective materials. Even 
if a wooden bridge is entirely rebuilt, the cost must be 
paid out of the earnings. In five years or less, the ties, 
especially those that lie low in ground, are found to be 



74* ECONOMICS 

rotten or cut with the chafing of the rails, and have to 
be replaced a few at a time. It is not long before the 
rails on the curves and gradients show wear and have to 
be renewed, the old rails being retired to service on side 
tracks. Switches, frogs, track fastenings, angle bars 
and all the rest, do not last long and must be gradually 
replaced. The cost of all these renewals and replace- 
ments must be paid for out of the current year's earnings 
and charged to "maintenance of permanent way." 

52, Illustrations of maintenance. — The problem of 
the maintenance of capital in the industrial world af- 
fords as many complex phases as those just noted in the 
management of a railroad. Not only must the indus- 
trial plant be maintained in good condition, but it must, 
from time to time, be replaced. There is a limit to the 
economy of repairs. In time a new engine, a new boiler, 
becomes necessary. This gradual deterioration of the 
industrial plant we know as depreciation. The fact 
that business realizes this fact is seen in the depreciation 
accounts that they carrj^ on their books. A man installs 
a new machine costing $10,000; he knows, from ex- 
perience, that the average life of such a machine is ten 
years; he further knows that it would be bad business, 
not to say illogical, to carry the value of that machine 
on his books during the ten years at $10,000. Common 
sense tells him that at the end of five years it will have 
fallen considerably in value. He, therefore, writes off 
in his books 10 per cent of the value each year, so that 
at the tenth year when his machine is ready for the junk 
pile, he deducts his last 10 per cent. His books, under 
these conditions, have represented the true status of his 
business at any particular moment.- Similarly business 
men write off from 2^^ per cent to 5 per cent each year 
for the depreciation of their factory buildings, as the 



CAPITAL 75 

average life of these buildings is from twenty to forty 
years. To estimate accurately the rate of depreciation 
on many forms of capital is a difficult task, often requir- 
ing the expert knowledge of an accountant. A good 
illustration is found in the case of a manufacturer who 
uses steam as the source of power. 

While the life of a boiler very largely depends upon 
the care and treatment it gets, the opportunity for re- 
pairs that is possible, the hours it is called upon to work, 
and the load it has to carry, much also depends upon 
the class of water with which it is fed. In a paper on 
the subject of "Depreciation of Water Works Plants," 
Mr. John W. Alvord, consulting engineer, of Chicago, 
gives an interesting table showing the history of thirty- 
two horizontal tubular boilers used in water-pumping 
stations in Illinois, Iowa and Michigan. The active life 
of these thirty -two boilers was found to have varied from 
six years for two boilers at Sterling, Illinois, where 
artesian water was used, to twenty-three years for two 
boilers at Oskaloosa, Iowa, where river water was used, 
the latter boilers being still in service. The average life 
of this group of thirty-two boilers was fifteen years. 
This data would seem to indicate that the rate of depre- 
ciation charged on the diminishing value of the boilers 
should be 20 per cent where artesian water is used, 10 
per cent where lake water is used, and 5 per cent where 
soft river water is used, other factors being equal. 
These rates may be subject to revision in view of the 
success with which boiler compounds are used ; the duties 
the boilers are called upon to perform, and finally, 
whether they are running easy, with ample time for re- 
pairs and cleaning, or whether they are crowded beyond 
their proper capacity. In some plants there is ample 
room in the boiler house and abundant capacity is pro- 



76 ECONOMICS 

vided, the load is light, the rest hours plenty, and the 
opportunities for proper repairs are amj)le, while the 
care given is of the best; in such berths the boilers ad- 
vance gracefully to old age and are often pensioned by 
being kept in reserve for emergencies or breakdowns. 
Here the life of active service is likely to be thirty years, 
or, in rare cases, even more. In other plants, where the 
conditions are reversed, where the exigencies of the bus- 
iness press sorely upon the boiler, necessitating the max- 
mum horse power capacity all the time ; where night 
work and Sunday work preclude the possibility of 
proper repairs being made, the life of a boiler of exactly 
the same make may be a third or even a quarter the time 
of where the conditions are all favorable. 

The phenomenon of depreciation is universal in the 
business world. A man who would be successful dares 
not overlook it. To replace the loss incurred through 
depreciation, a large amount of saving is necessary. 

53. Meaning of the consumption of capital. — All cap- 
ital, although saved, is consumed in the processes of pro- 
duction. By the consumption of capital we mean that it 
is used up and destroyed. Everything which is produced 
is consumed, and in this way, even the most permanent 
forms of capital are destroyed. Furthermore, a large 
number of the materials of production are entirely de- 
stroyed in the processes of manufacture, so far as 
their original form is concerned. For example, coal 
under a factory boiler is burned up and destroyed. 
In addition to the consumption of capital there is 
the most familiar form in the consumption of fin- 
ished goods, the consumption of food and clothing 
and other necessities by mankind. The destruction of 
these consumable goods we must classify as either pro- 
ductive or unproductive consumption. 



CAPITAL 77 

54. Productive and unproductive consumption. — 
Productive consumption of consumable goods results in 
either maintaining or increasing the productive equip- 
ment of society. All consumption of commodities by 
the world's workers, i. e., by every man, woman and 
child who is employed in industry, is productive con- 
sumption. 

All luxurious and extravagant consumption is un- 
productive consumption. Illustrations of unproductive 
consumption are furnished 1 y the social dependents, de- 
fectives and delinquents, paupers, criminals and lunatics, 
whose support is a public burden. The expense of war 
is unproductive consumption. This last statement may 
be qualified. While the expense of war may be un- 
productive consumption, money spent on fortifications 
and navies should rather be looked upon as insurance. 
It is not strictl}^ logical to class the purchase of cham- 
pagne and similar luxuries with the buying of a man-of- 
war. Military and naval expenditure is rather pay- 
ment of insurance than unproductive consumption. In 
the recent naval discussion in Great Britain the signifi- 
cant statement was made that the cost of four days of 
war would build one battle ship. In general, however, 
all consumption may be classed as unproductive which 
results in reducing the wealth or increasing the pro- 
tective equipment of society. 

The concrete forms which prodiactive capital may assume are 
as follows : 

1. Productive improvements upon land, such as fences, drains, 
fertilizers, etc. The land in itself is a gift of nature, not a 
product of human industry. It is not created by man to serve 
as an aid to Indirect production. Productive improvements may 
be counted as capital so long as they can be distinguished from 



78 ECONOMICS 

the land itself. Fertilizers or drains become, in a shorter or 
longer time, indistinguishably merged with the land. 

2. Buildings, such as factories or workshops, devoted to the 
purpose of aiding in the process of indirect production. 

3. Means of transportation, such as roads, canals, and rail- 
ways. 

4. Raw materials, such as iron, wood, cotton, silk, and wool, 
which are consumed in the act of production, hut reappear in 
the product. 

5. Auxiliary materials, such as coal, lubricating oils, and 
bleaching materials, which aid the productive process, but do 
not reappear in the product, 

6. Tools and machines. Within the last century these have 
become the most important form of capital, in many respects. 

7. Domesticated animals used in production. Breeds of do- 
mestic animals have been so improved by scientific breeding that 
they are distinctly a product of human industry. 

8. Money, weights and measures, and scales and balances. 
We shall soon see that these objects are a most important means 
of carrying on capitalistic or roundabout production. 

9. Commercial stocks of finished products or consumers' 
goods. These do not include consumers' goods in the hands 
of the final consumers. Strictly speaking, finished products 
should not be called consumers' goods until they reach the final 
consumers. Capitalistic production would be impossible if capi- 
talist-jDroducers did not produce goods for distant markets and 
for a future season's consumption. Wheat must be produced 
in one season, and a sufficient stock must be carried over to last 
until the next harvest. Spring dress goods must be produced 
several months in advance of the season when they are demanded. 
Agricultural implements, made in America and exported to 
Australia, may be several months in reaching the final consumer. 
Merchants perform the important social function of carrying 
all such commercial stocks of goods as require weeks or months 
to pass from producer to consumer. Commercial or mercantile 
stocks of finished products are an indispensable aid to the process, 
of capitalistic production, and fall under our definition of capi- 



CAPITAL 79 

tal. They are really producers' and not consumers' goods. 
They are materials to which time and place utilities are being 
added by the merchants who forward them to consumers. 

10. Capital used by persons who render personal services. 
The instruments of the surgeon, and the books and scientific 
apparatus of the student are examples. A fuller classification 
would include at least the following objects under this form of 
capital: (a) all scientific and professional instruments and ap- 
paratus; (b) churches, theaters, public halls, and all buildings 
necessary for rendering personal services; (c) courthouses, 
jails, forts, warships, government buildings, and all the appli- 
ances necessary for public functions. All these are means of 
producing indirectly services which could not be rendered directly 
without such appliances.^ 

James J. Hill, the great railroad builder, had in mind 
the relative scarcity of agricultural capital in the United 
States when he spoke as follows before the American 
Bankers' Association at Chicago in September, 1909: 

The consumers of bread throughout the world increase by 
probably from four to five millions every year. In our own 
country we shall require from thirteen to fifteen million bushels 
more annually for seed and home consumption. The domestic 
supply cannot be maintained by present methods. Not only 
is the cultivation of the soil being neglected, but it is also no- 
toriously ineffective. 

All this has come about notwithstanding economic changes 
favorable to the occupation of the farm. 

Practically only a few months lie between a universal cessa- 
tion of production and the destruction of the human race by 
starvation. The marvelous diversity of modern industry and 
its products blind us to the bare simplicity of the situation. 
Those who, like you, are main factors in supplying to industry 
the means to carry it on, who open up the main and lateral chan- 
nels through which the fertilizing stream of capital may be 
1 C. J. Bullock, " Introduction to the Study of Economics," pp. 133-5. 



80 ECONOMICS 

turned upon the otherwise barren field of labor, should be al- 
ways mindful of the first great source and storehouse of national 
wealth, and the most sensitive whenever it is depleted or endan- 
gered. 

55. What constitutes economic usefulness. — The cor- 
ollaiy to this proposition is that the man of the greatest 
economic use in the world is the man who devotes the 
larger portion of his income to production, or who saves 
the larger part of his income. The spendthrift, the man 
who dissipates his patrimony and who wastes his sub- 
stance in extravagance and luxury, although he may put 
a large amount of money into circulation, is, nevertheless, 
an enemy to society, because he is wasting its resources. 
The man who uses his income to build factories, rail- 
roads, to open mines, to clear and drain land, not only 
increases his own wealth, but also the wealth of society; 
while, on the other hand, the man who puts his income 
into fine houses and yachts, into the establishment and 
maintenance of large retinues of servants, and the pur- 
chase of enormously costly tapestries, rugs, rare books 
and pictures, all destined for his own enjoyment, is not 
only reducing his own wealth below the figure at which it 
would stand, but is also impairing the wealth of society. 
The man serves his fellowmen best, who most rapidly 
increases his wealth, in other words, by using it to pro- 
duce capital goods in the multitude of which the wealth 
of society consists. 



CHAPTEIl VIII 

DIVISION OF LABOR 

56. The meaning of the division of labor. — ^We have 
now to consider the method by which the three factors 
in production — natural agents, labor and capital — are 
combined in the productive process. Singly, no one of 
these factors is of any account in production ; united, they 
can accomplish almost anything. This cooperation is 
accomplished by means of the division of labor. By the 
division of labor we mean the separation of the employ- 
ments of natural agents, labor and capital, so that each 
producer has only a single thing to do, and so that each 
resource and each kind of machinery is utilized in a par- 
ticular way. 

We can best understand the division of labor, a broad 
term denoting the specialization of the employments of 
the three fa,ctors of production, by a description of the 
operations which go on in a typical manufacturing plant 
— a woolen mill. 

57. Illustration of the division of labor by the opera- 
tions of a woolen mill. — The operation of manufacturing 
woolen cloth is subdivided as follows: (1) Sorting the 
wool to separate the different grades which are used for 
different fabrics; (2) picking, which is performed by 
running the wool through a machine called a pickers 
which tears it apart, takes out burrs and other such mat- 
ter which was not removed by washing, and separates 
the fibres in such a way that they are ready for the next 
operation; (3) scouring, to take all the grease and dirt 

1-6 81 



82 ECONOMICS 

out of the wool and leaving it white ; (4) dyeing, which is 
accomplished by boiling the wool in large vats filled 
with dye solution; (5) carding, the object of which 
is to further separate the fibres, to mix the colors, and 
to get the wool in a condition to be spun. It is accom- 
plished by conveying the wool between cylinders covered 
with wire cloth which pulls the fibres apart, thoroughly 
mixes them, and lays them side by side. The next 
operation is (6) spinning, which is a combined process 
of drawing out and twisting. The object of spuming 
is to reduce the size of the strand and to make the wool 
ready for the loom. After the yarn is reduced to a 
proper size, it is ready for weaving. (7) Weaving con- 
sists in uniting the threads in such a way as to form 
a fabric. This is done by interlacing one set of threads 
called the warp with another set called the weft. The 
warp threads are drawn slowly through the loom in one 
way, and a shuttle, called a bobbin, containing the weft 
threads goes across and back in the opposite way. This 
interlaces the threads and forms the cloth. (8) The 
cloth is then taken to the finishing room, where it is 
soaped and run between rollers in order to shrink it; it 
is next run through a napper or gig, a cylinder studded 
with teazels which raises the nap on the face of the cloth. 
The long threads of this nap are next sheared, the cloth 
is then dried and run through a steam brush, examined 
a second time and run through an ironing machine. 
The final stage in finishing is to re-examine the cloth, 
measure, fold, weigh, wrap and ship it. 

Here are eight different stages in the manufacture 
of woolen cloth, and each stage, as we have seen, is mi- 
nutely subdivided into minor operations. Each opera- 
tion, and in some large mills there are liundreds of 
separate processes going on at the same time, is in charge 



DIVISION OF LABOR 83 

of a foreman or boss who devotes his entire attention to 
the particular work over which he is placed. Under 
the bosses are workmen and laborers, each one exclu- 
sively occupied in doing some one particular thing. For 
example, before the yarn is ready to be woven, the warp 
threads must be wound upon a beam and the ends of the 
threads inserted in long needles which form what is 
known as the harness of the loom. In a large mill sev- 
eral men will be occupied in doing nothing all day long 
save inserting the warp threads in the eyes of the harness 
needle. Similar minute subdivisions of employment 
are met with in every department of this mill. 

Adam Smith in his "Wealth of Nations" presents an 
illustration of the advantages of the division of labor 
which has become a classic : 

To take an example, therefore, from a very trifling' manu- 
facture ; but one in which the division of labor has been very 
often taken notice of, the trade of the pin-maker ; a workman not 
educated to this business (which the division of labor has ren- 
dered a distinct trade), nor acquainted with the use of the ma- 
chinery employed in it (to the invention of which the same 
division of labor has probably given occasion), could scarce, 
perhaps, with his utmost industry, make one pin a day, and 
certainly could not make twenty. But in the way in which this 
business is now carried on, not only the whole work is a pecu- 
liar trade, but it is divided into a number of branches, of which 
the greater part are likewise peculiar trades. One man draws 
out the wire, another straights it, a third cuts it, a fourth 
points it, a fifth grinds it at the top for receiving the head ; to 
make head requires two or three distinct operations ; to put it 
on is a peculiar business ; to whiten the pins is another ; it is 
even a trade by itself to put them into the paper; and the im- 
portant business of making a pin is, in this manner, divided into 
about eighteen distinct operations, which, In some manufactories, 
are all performed by distinct hands, though in others the same 



84. ECONOMICS 

man will sometimes perform two or three of them. I have seerj 
a small manufactory of this kind where ten men only were em- 
ployed, and where some of them, consequently performed two 
or three distinct operations. But though they were very poor 
and therefore but indifferently accommodated with the necessary 
machinery, they could, when they exerted themselves, make 
among them about twelve pounds of pins a day. There are in 
a pound upwards of four thousand pins of middling size. 
These ten persons, therefore, could make among them upwards 
of forty-eight thousand pins a day. Each person, therefore, 
making a tenth part of forty-eight thousand pins, might be 
considered as making four thousand eight hundred pins a day. 
But if they had all wrought separately and independently, and 
without any of them having been educated to this peculiar busi- 
ness, they certainly could not each of them have made twenty, 
perhaps not one pin a day ; that is, certainly, not the two hun- 
dred and fortieth, perhaps not the four thousand eight hun- 
dredth part of what they are at present capable of performing, 
in consequence of a proper division and combination of their 
different operations. 

58. Advantages of division of labor. — This division of 
labor, which we have also defined as the specialization 
of employment, is the universal characteristic of modern 
industry. In some form it has been met with almost 
from the beginning. There have always been black- 
smiths, carpenters, masons, stone-cutters, tailors and 
shoemakers. This division of trades is familiar to 
everyone. It has remained for modern production, 
liowever, to bring together a large number of these 
separate trades under one roof, and further to sub- 
divide them until each man has only a small division 
of the entire process under his charge. 

.59. Increased efficiency through the division of labor. 
■ — The division of labor greatly increases the effective- 
ness of production. In the first place, it increases the 



DIVISION OF LABOR 85 

productive power of the individual. By constant repe- 
tition of a certain operation, such as inserting threads 
in harness needles, this operation, which is by no means 
easy to a beginner, becomes habitual or mechanical; 
an industrial habit is formed. The operative's move- 
ments are, therefore, greatly simplified. He makes no 
false motions; his hands work as accurately as though 
they were guided by machinery. Indeed, for all prac- 
tical purposes, if fatigue could be eliminated from the 
calculation, he has become a machine, and works with the 
accuracy and certainty of power-driven mechanism. Fi- 
nally, the specialization of emploj^ment diminishes the 
fatigue of the operative. Everyone knows from obser- 
vation that the fatigue of performing an operation, 
which has been thoroughly learned, is much less than 
while the operator is learning to do this work. Having, 
by minute specialization and careful attention to per- 
forming a few operations, correctly learned how to do 
these things unconsciously, the fatigue of constant at- 
tention, which exhausts the beginner, is largely absent. 
A man can sit down at his loom or at his bench for five 
hours at a time without feeling especially wearied at 
the end of the day. 

Adam Smith elaborates this point as follows, in the 
chapter already referred to: 

The great increase in the quantity of work, which, in con- 
sequence of the division of labor, the same number of people are 
capable of performing, is owing to three 'different circum- 
stances ; first, to the increase of dexterity in every particular 
workman ; secondly, to the saving of time which is commonly 
lost in passing from one species of work to another ; and, lastly, 
to the invention of a great number of machines which facilitate 
and abridge labor, and enable one man to do the work of 
many. 



86 ECONOMICS 

First, the improvement of the dexterity of the workman nec- 
essarily increases the quantity of work he can perform; and 
the division of labor, by reducing every man's labor to some 
one simple operation, and by making this operation the sole 
employment of his life, necessarily increases very much the dex- 
terity of the workman, A common smith, who, though accus- 
tomed to handle the hammer, has never been used to make nails, 
if upon some particular occasion he is obliged to attempt it, 
will scarce, I am sure, be able to make above two or three hun- 
dred nails in a day, and those, too, very bad ones. A smith, 
who has been accustomed to make nails, but whose sole or prin- 
ciple business has not been that of a nailer, can seldom with his 
utmost diligence make more than eight hundred or a thousand 
nails a day. I have seen several boys under twenty years of 
age who had never exercised any other trade but that of mak- 
ing nails, and who, when they exerted themselves, could make, 
each of them, upwards of two thousand three hundred nails a 
day. The making of a nail, however, is by no means one of 
the simplest operations. The same person blows the bellows, 
stirs or mends the fire as there is occasion, heats the iron, and 
forges every part of the nail. In forging the head, too, he is 
obliged to change his tools. The different operations into which 
the making of a pin, or of a metal button, is subdivided, are 
all of them much more simple, and the dexterity of the person, 
of whose life it has been the sole business to perform them, is 
usually much greater. The rapidity with Avhich some of the 
operations of those manufactures are performed, exceeds what 
the human hand could, by those who had never seen them, be 
supposed capable of acquiring. 

Secondly, the advantage which is gained by saving the time 
commonly lost in passing from one sort of work to another, is 
much greater than we should at first view be apt to imagine it- 
It is impossible to pass very quickly from one kind of work 
to another, that is carried on in a different place, and with 
quite different tools. A country weaver, who cultivates a small 
farm, must lose a good deal of time in passing from his loom 
to the field, and from the field to his loom. When the two trades 



DIVISION OF LABOR 87 

can be carried on in the same workroom, the loss of time is nO' 
doubt much less. It is, even in this case, however, very con- 
siderable. A man commonly saunters a little in turning his 
hand from one sort of employment to another. When he first 
begins the new work he is seldom very keen and hearty ; his 
mind, as they say, does not go to it, and for some time he 
rather trifles than applies to good purpose. The habit of saun- 
tering and of indolent and careless application, which is nat- 
urally, or rather necessarily acquired by the workman who is 
obliged to change his work and his tools every half hour, and 
to apply his hand in twenty different ways almost every day of 
his life ; renders him almost always slothful and lazy, and in- 
capable of any vigorous action and application even on the 
most pressing occasions. Independent, therefore, of his de- 
ficiency in point of dexterity, this cause alone must always re- 
duce considerably the quantity of work which he is capable of 
performing. 

Thirdly, and lastly, everybody must be sensible how much 
labor is facilitated and abridged by the application of proper 
machinery. It is unnecessary to give any example. I shall 
only observe, therefore, that the invention of all those machines 
by which labor is so much facilitated and abridged, seems to 
have been originally owing to the division of labor. Men are 
much more likely to discover easier and readier methods of at- 
taining any object, when the whole attention of their minds 
is directed towards that single object, than when it is dissipated 
among a great variety of things. But in consequence of the 
division of labor, the whole of every man's attention comes nat- 
urally to be directed towards some very simple object. It is 
naturally to be expected, therefore, that some one or other of 
those who are employed in each particular branch of labor 
should soon find out easier and readier methods of performing 
their own particular work, wherever the nature of it admits of 
such improvement. A great part of the machines made use 
of in those manufactures where labor is most subdivided, were 
originally the inventions of common workmen, who being each 
of them employed in some very simple operation, naturally 



88 ECONOMICS 

turned their thoughts towards finding out easier and readier 
methods of performing it. Whosoever has been much accus- 
tomed to visit such manufactures, must frequently have been 
shown very pretty machines, which were the inventions of such 
workmen, in order to facihtate and quicken their own particular 
part of the work. In the first fire-engines, a boy was con- 
stantly employed in opening and shutting alternately the com- 
munication between the boiler and the cylinder, according as 
the piston either ascended or descended. One of those boys, 
who loved to play with his companions, observed that, by tying 
a string from the handle of the valve which opened this com- 
munication to another part of the machine, the valve would open 
and shut without his assistance, and leave him at liberty to 
divert himself with his play-fellows. One of the greatest im- 
provements which has been made on this machine since it was 
first invented, was in this manner the discovery of a boy who 
wanted to save his own labor. 

60. Increased specialization. — The complexity of the 
specialization of employment, it should be remarked in 
passing, is constantly increasing as industry becomes 
more intricate and more difficult of comprehension. 
The acquisition of proficiency in most trades has al- 
ways required a long period of apprenticeship, but for 
a man who wishes to reach the top in any trade or pro- 
fession to-daj^ this period of preparation is greatly 
extended. Take, for example, the profession of med- 
icine. Fifty years ago a young man spent two or 
three years in a physician's office, obtained a certificate 
of good character, went before the state examining 
board, if this institution existed — and it was not always 
found — and obtained a license to practice medicine. 
To-day, in many states, the prospective physician must 
first take a thorough high school course, follow this 
with four years of severe work in a medical college, 
and, finally, pass a supplementary examination set by 



DIVISION OF LABOR 89 

the state board. It is even proposed by some influ- 
ential physicians to require several years' experience 
in a hospital, under supervision, before the student is 
permitted to pi-actice. In mechanical pursuits, more- 
over, the equipment of industrial plants has now become 
so costly and intricate, and the importance of mere mus- 
cular activity has been so greatly diminished, that men 
cannot be trusted in positions of responsibility unless 
they have mastered the details of their employment by 
a long and arduous study, supplemented by experience. 
In many instances, intricate and costly processes are 
performed entirely by machinery, without any labor 
being directly utilized. In such industries, a high de- 
gree of technical skill is required in the operatives who 
direct these processes and handle machinery. The best 
illustration of this general statement is furnished by 
the steel industry. The following description of the 
machinery employed in open-hearth steel making, shows 
the extent to which labor has been superseded by 
mechanical appliance. 

An open-hearth, or Siemens-Martin, furnace in its many 
forms has much the outward appearance of a gigantic baker's 
oven well strapped with iron buckstaves. There is an iron door, 
and through this when opened may be seen, on the hollowed re- 
fractory floor of the furnace, a pool of bubbling molten metal 
of 40 or 50 tons, brought to so intense a heat that the eye can 
no more look at it than on the noonday sun.' The particular 
row of furnaces I have in mind is one of the sets of the Home- 
stead Works. There are 20 altogether, and they were com- 
menced about two years ago, when ten 47-ton furnaces (actual) 
were erected. After only one year had elapsed ten more fur- 
naces were built of rather larger capacity, working 50-ton 
charges. At the time of my visit four more of the larger size 
were in progress, making 24 in all ; but further ones were shortly 



90 ECONOiVriCS 

to be added. This instance of rapid progress by no means 
stands alone ; it is typical. 

The materials used for producing the mild steel — pig iron, 
scrap, and ore — are taken from the railway wagons by electric 
traveling cranes, and placed in iron charging boxes or trouglis 
which are carried on small trucks. These boxes form part of 
a very ingenious machine which constitutes a leading feature in 
a good many steel plants of America. This is known as the 
Wellman-Scaver charging machine. It is one of the most im- 
portant of the labor-saving appliances used in the United 
States steel works. The charging platform of a battery of 
open-hearth furnaces has rails laid on it running parallel with 
the row of furnaces. Upon these the charging machine is 
traversed on its wheels so as to command each furnace door in 
turn. The machine consists essentially of a strong platform and 
framework, upon which are the charging mechanism and the 
electrical motors that perform all the operations. The machine 
is traversed on its rails until it is opposite to the charging door 
of the furnace, the charging box on its bogie being between the 
furnace and the machine. The operator, seated on the machine, 
simply by turning an electrical switch causes a strong steel arm 
or charging-bar to be thrust forward. This grasps the charg- 
ing box, pushes it bodily through the open door into the glow- 
ing furnace, and, turning it over, spills the contents into the 
pool of seething metal— or bath, as it is technically called. As 
the furnace doors are opened by hydraulic means, and as the 
bogies carrying the charging boxes are also moved by the ma- 
chine, no labor is needed beyond that of the attendant who puts 
the mechanism into action. A charge of half a ton is placed in 
the furnace with almost incredible smoothness and swiftness, a 
few seconds being quite sufficient for the purpose. 

This is the new way of charging an open-hearth furnace. 
The old way (which is largely the present way) is exactly that 
which would have been followed by Adam, or by Tubal Cain, 
if he had had a furnace to charge. The Wellman-Seaver ma- 
chine is an advance at a stride. It carries us from the most 
primitive form of labor to that of a wonderfully organized 



DIVISION OF LABOR 91 

apparatus, aftr.ated by %e subtle power of which we now hear 
so much 0->id have learnt so little, but which we know is destined 
to relie-i^e humanity of a great part of the drudgery of civiliza- 
tion. By machinery of this kind men are set free to exercise 
those higher gifts which are the common heritage of all, but 
which are too often submerged by continuous labor of an 
arduous nature carried out under distressing conditions/ 

In every trade and profession the need of specialized 
training is on the increase. The complexity of modern 
life makes this inevitable. This specialization has the 
great advantage of increasing the efficiency of the 
worker. This is clearly seen in the profession of med- 
icine where we now have physicians for nearly every 
organ of the body. We have men who specialize on 
the treatment of the ear, the eye, the throat, on lung 
diseases, on diseases of the heart and stomach. We 
have lawyers who practice nothing but patent law or 
criminal law or real estate law. The all-round engineer 
has passed away, and we now have the civil engineer, 
the mechanical engineer, the electrical engineer and the 
cliemical engineer. Even in the machine shop, special- 
ization has entered and the day of the all-round machin- 
ist, the man who could operate almost any tool, is nearly 
ended. 

61. Illustration from the meat-ijacking industry.— 
The packing industry, alread}^ referred to, furnishes 
abundant illustration of the extent to which extreme 
specialization has been carried. For example, three men 
are employed in getting the brains out of a steer's skull. 
One man has been a member of this gang for twenty 
years; he is, for all practical purposes, a machine, and 
he repeats his part of the work thousands of times with- 
out perceptible variation, 

1 " American Engineering Competition," p. 45. 



92 ECONOMICS 

It would be difficult to find another industry where division of 
labor has been so ingeniously and microscopically worked out. 
The animal has been surveyed and laid off like a map ; and 
the men have been classified in over thirty specialties and twenty 
rates of pay, from sixteen cents to fifty cents an hour. 
The fifty-cent man is restricted to using the knife on the most 
delicate parts of the hide (floorman), or to using the ax in 
splitting the backbone (splitter), and wherever a less skilled 
man can be slipped in at eighteen, eighteen and a half, twenty, 
twenty-one, twenty-two and a half, twenty-four, twenty-five 
cents, and so on, a place is made for him and an occupation 
mapped out. In working on the hide alone there are nine posi- 
tions at eight different rates of pay. A twenty-cent man pulls 
off the tail, a twenty-two-and-a-half-cent man pounds off an- 
other part where the hide separates readily, and the knife of the 
forty-cent man cuts a different texture and has a different "feel" 
from that of the fifty-cent man. Skill has become specialized 
to fit the anatomy. 

In this way, in a gang of 230 men killing 105 cattle an hour, 
there are but 11 men paid 50 cents an hour, 3 men paid 45 
cents, while the number getting 20 cents and over is 86 and the 
number getting under 20 cents is 144.^ 

62. Economics effected by divisio7i of labor. — Three 
objects are gained by this division of labor. First, 
cheaper men — unskilled and immigrant labor — can be 
utilized in large numbers. Second, skilled men become 
more highly expert in the quality of their work. 
While, on the one hand, this greatly increases the 
proportion of low -wage men, it also pushes up the 
wages of the very few skilled men on the delicate and 
particular parts of the work. An all-round butcher 
might expect to earn 35 cents an hour, but the highly 
specialized floorman or splitter earns 50 cents an hour. 
Some of these expert floormen work a week at a time 

1 Common's " Trade Unionism." 



DIVISION OF LABOR 93 

without cutting a single hide, so deft and delicate be- 
comes their handling of the knife. If the company 
makes a few of these particular jobs desirable to the 
men and attaches them to its service, it can become inde- 
pendent of the hundreds who work at the jobs where 
they can do but little damage ; and their low wage brings 
down the average to 21 cents where, if all were all-round 
butchers, the average would be 35 cents. Consequently, 
in the course of time, the companies put a few of the 
strongest men and those with a particular knack for their 
work on "steady time," paying them a salary of $24 to 
$27 a week, regardless of the time actually worked ; but 
the other nine-tenths of the gang are hired by the hour 
and paid for the time at work. These steady-time men 
not only stand by the company, but act as pace setters; 
and in this way a third object of division of labor is 
brought about, namely, speed. 

This minute division of labor grew with the slaughter- 
ing industry, following the introduction of the refrig- 
erator car and the marketing of dressed beef in the 
decade of the seventies. Before the market was 
widened by these revolutionizing inventions, the killing 
gangs were small, since only the local demands were 
supplied. But when the number of cattle to be killed 
each day, increased to a thousand or more, an increas- 
ing gang or crew of men was put together; and the 
best men were kept at the most exacting work. At 
what point the greatest economy is reached was discov- 
ered by experiment and by comparison of one house 
with another. Taking a crew of 230 butchers, helpers, 
and laborers handling 1,050 cattle a day under the union 
regulations of output, the time required for each bullock 
from the pen to the cooler, the hide cellar, and all the 
other departments, to which the animal is distributed, 



94 ECONOMICS 

is equivalent to 131 minutes for one man. But this 
is made up of 6.4 minutes for the 50 cent man, II4 min- 
utes for the 45 cent man, and so on; and the average 
wage per hour for the gang men would not exceed 21 
cents, making the entire lahor cost about 46 cents per 
Indlock. 

63. NatTowing effect of specializatio?i and its rem- 
edy. — By some, this narrow specialization of activity is 
deplored. It is claimed that men who do only one thing 
are less useful citizens and are of less use to themselves 
than men with broad interests. It is claimed, more- 
over, that when a man is turned into a machine, his 
power of initiative and ambition are destroyed, and he 
falls into a groove from which he is not anxious to 
escape. The answer to this argument is that the broad 
training may be secured in advance of entering upon 
the employment in manual training schools or technical 
institutions of various kinds, and that even if a man is 
occupied in performing only a few operations, he still 
has ample leisure to keep up with the progress of his 
profession by reading and studying. 

It is further pointed out, and this is an argument of 
much weight, that invention and improvement are 
enormously furthered by the subdivision of employ- 
ment. When a man gives his entire attention to one 
small machine, or one mechanical operation, he comes 
in time to so thoroughly understand this that he is 
frequently able to suggest changes which will lighten 
his labor and increase the speed and effectiveness of the 
operation. In all large works, inventions are constantly 
being made by employes, whose attention has been called 
to the opportunity of improvement by the concentra- 
tion of their attention within a narrow field. 



DIVISION OF LABOR 95 

64. Division of labor and specialization of plant. — - 
This minute subdivision of industry has extended, not 
merely to individual employment, but to organizations 
of individual employment. In every industry factories 
are becoming more and more specialized in the produc- 
tion of one thing. No matter what the industry may 
be, cotton, woolen, leather, glass or copper manufac- 
ture, the tendency to specialize in the production of one 
thins- is on the increase. The reason is as follows: 
Specialization means that the entire energies of the mill- 
force are concentrated on the production of one thing, 
which enables that thing to be produced at lower cost 
than if a number of articles are produced under the 
same roof. A factory, just as a man, can do a few 
things much more efficiently than many things. "Jack 
of all trades and master of none" is as true of large 
enterprises as of individuals. For the same reason 
specialized industry finds a readier sale for its products. 
A mill becomes known in a certain line because it turns 
out only one thing; and when a particular article is 
wanted, the name of that mill at once rises in the buy- 
er's mind. 

A minor advantage of speciahzed industry, which is 
often, however, of great importance, is that the surplus 
stock of such a plant, consisting, as it does, of only one 
kind of goods, is much more available for quick deliv- 
eries and to satisfy sudden and urgent demands, than 
^\hen the stock includes a number of articles, in which 
case, any extra demand will soon exhaust it, and compel 
the company to decline orders, and thus lose custom. 

65. Illustrations of economics of specialization.— 
The following illustrations of the effect of specializa- 
tion in decreasing costs are taken from a lecture deliv- 



96 ECONOMICS 

ered in 1906 by Mr. Alexander E. Outerbridge, Jr., of 
Philadelphia, one of the leading engineers in the United 
States. 

Specialization, in manufacturing, means that the manufac- 
turer selects some article for which there is a big demand and 
devotes his time to it, so as to reduce the cost and be in partial 
control of the trade. I will give a few illustrations from ex- 
perience and observation: 

Where the same machinery and appliances are used, but the 
quantity is increased : In making two particular parts of a ma- 
chine, the actual cost (these are figures taken from the cost 
books) was $20.19. They rarely make one. The same article 
in lots of twelve cost $6.12. If I had said in making five hun- 
dred, you might have been prepared to look for such a reduc- 
tion, but when I said there is a reduction from two to twelve 
of 69 per cent, what does it mean.? The reason is that in 
putting one piece of metal on a machine for the purpose of 
drilling or milling it, there is a great deal more time required in 
setting the piece on the machine than there is required to do the 
work, and if you have a large number of pieces and the same 
setting up of the machine will answer for the whole work, the 
cost of setting up is divided up among what you do, and conse- 
quently the price is decreased. 

Another illustration is furnished by a small piece of machine 
work, a brass portion of a machine not much larger than a 
lend pencil. It has to be turned inside and outside, very time 
in measurement, threads cut upon it and they have to be just 
right. The actual cost of doing one piece is 25 cents, the cost 
of two is 15 cents, the cost of five 10 cents each, the cost of ten 
5 1/2 cents each, while the cost of 500 is 2 cents a piece. 

66. To show the difference in cost where different 
machinery and different processes are used. — The first 
illustration was where the same machine and the same 
process were used, the only difference being the num- 



DIVISION OF LABOR 97 

ber. Now we come to the second illustration, where 
we show differences in cost when different machines and 
different processes are used. 

For making one hundred %'''x4'' bolts on a modern lathe, 
by reducing the body of a bolt from a bar of steel, the cost 
is $15.84. These are bolts which have a hexagonal head and 
have a thread to turn upon. The bar of steel from which such 
bolts are made is a hexagonal bar, of about 20 to 30 feet in 
length, and the modern "turret" lathe is an instrument so con- 
structed that it takes the end of this bar, cutting it to the proper 
size required, the bolt passing from one arm of the "turret" 
lathe to another until it is completed, when it drops into a box. 

When the "turret" lathe machine was brought into the mar- 
ket it was such a great advancement over the ordinary lathe that 
the concern with which I am connected, although it is a maker 
of lathes, felt that it was to their advantage to pay $1,000 a 
piece for these new lathes to make such bolts, because they 
could make them for $15.84 a hundred, whereas by their own 
lathes it cost $35. That was considered a great reduction and 
our pride had to be swallowed. The "turret" lathe is a ma- 
chine upon which there are revolving turrets and there are a 
dozen different cutting tools arranged in the arms of the tur- 
rets, each tool performing its function. One tool cuts the bar 
into proper lengths, one will cut the thread, another put the 
finishing touches, and when the bolt is complete it falls into a 
box. 

This concern was making these bolts to great satisfaction, 
when one day a man stepped into the office and said he would 
be pleased to have us look at a new bolt, which he could furnish 
us for $5.88 a hundred. We examined the bolt and found that 
it was better than we were making ourselves. Our bolts were 
made out of hexagonal bars and there was a great deal of waste 
in scrap. Now this man had found that he can take, instead 
of a hexagonal bar the size of the head of the bolt, a round bar 
the size of the thread and to that he will weld a head. The 



I— y 



98 ECONOMICS 

head can be made of an^' metal desired. These bolts made by 
welding the heads to the body of the bolt are sold for $5.88 a 
hundred. 

67. Illustration from the manufacture of incandescent burn- 
ers. — When Kdison first made his incandescent lamp the cost 
was $3. Now there are many similar lamps sold for less than 
twenty cents. In 1881, when this system of electric lighting 
was first brought to light by INlr. Edison, he sent an invitation 
to the various institutions in the country to have a representa- 
tive come and see the lighting of INIenlo Park, New Jersey, and 
I was selected as representative of the Franklin Institute. I 
went there during the day so as to see the lamp in daylight, and 
Mr. Edison took me over the works and showed mc the process 
of making the lamps. I asked him how much it cost to make 
them. He replied $3 at first and now $1.50. I said that it 
appeared to me that that price is prohibitive. "Well," he said, 
"young man, I told you that when I began to make these it cost 
me $3. It now costs $1.50. Some day I expect to make them 
for 25 cents." Twenty-five years later I had occasion 
to go to a board meeting of a company of which Mr. Edison 
was president. I took my seat at the table and when my name 
was called, Mr. Edison recognized me. After the meeting he 
came and spoke to me. He said, "The last time I saw you I 
told you the lamps Avcre costing me $1.50 and I expected to 
make them for 25 cents. You can buy all you want for 19 
cents." 

68. Second result — continuous processes. — The sec- 
ond advantage which arises fironi the division of labor 
is that it enables the combination of a large number 
of operations into a continuous process. Consider, for 
example, the operation of manufi^cturing woolen clotli 
already described. This includes a large number of 
separate processes, extending from the time the wool 
is delivered at the factory, until the time the cloth is 
dehvei-ed to the railroad for shipment. Kacli one of 
these operations, in consequence of the division of labor, 



DIVISION OF LABOR 99 

is j^oiiig on simultaneously. At every minute of the 
working day, wool is being received, sorted, cleaned, 
graded, spun, woven, finished, packed and shipped. 
While the mill is running, it may almost be said that a 
stream of the raw materials is running into the store 
room, and a stream of the finished product is running 
out of the shipping room. This can be said of every 
factory in the land. The productive operation is every- 
where continuous; it is not a series of disjointed stages, 
but a continuous flow, a steady transformation of raw 
material through various stages into the finished prod- 
ucts. 

It is obvious that this continuity of production would 
be impossible without the division of employment. If 
the men who received the wool were obliged to stop 
after a few moments and sort what they had received; 
if they were obliged to go to the next department and 
clean and scour the wool, and then to carry the same 
lot of wool on through the operation of spinning and 
weaving and finishing, is it not evident that the pro- 
ductive power of each one of them would be enormously 
cm-tailed? It would be, in fact, the barest fraction of 
w^hat it is under the present system. On the other 
hand, by giving each man one thing to do, by placing 
in his hands the care of one of a large number of con- 
tinuous stages in a productive process, all these opera- 
tions can be performed simultaneously; every man can 
give his entire strength to doing that thing which he 
has learned to do best, and the various operations can be 
made to so supplement each other as to result in a pro- 
duction hundreds of times larger than could be achieved 
by one man working by himself. 



CHAPTER IX 

LOCATION OF INDUSTRIES 

69. Location of extractive industries. — An important 
aspect of the division of labor relates to the specialization 
of localities in conducting those industries to which they 
are best suited. Just as the individual confines himself 
to one occupation in which his efforts are most effective, 
so the city or the locality devotes itself to specialized 
pursuits. As a result of this localization of industry, 
the production of wealth is greatly increased. The 
causes determining the localization of industry are as 
follows : In the first place, all the operations connected 
with the extractive industries — mining, agriculture, 
lumbering — are necessarily carried on where the natural 
resources are located. Generally speaking, the subse- 
quent operations which reduce the bulk and increase the 
value of these raw materials are carried on at the source 
of supply, whenever the decrease in weight more than 
offsets the higher freight charges that result from the 
increased value given to the raw material by the manu- 
facturing process. The lumber industry is the most 
common example. Logs are seldom carried far to the 
sawmill. The gain in value from the log to the plank 
is not so great as to call for a freight rate much higher 
than that charged on the log; while the loss in weight, 
from the first sawing, is so considerable as to make the 
expense of shipping rough boards much less than the 
cost of shipping logs. When we come to the subsequent 

100 



LOCATION OF INDUSTRIES ^101 

operations of wood working, however, in which the 
rough boards are planed and grooved and made into 
furniture and other articles, then we find that, other 
things being the same, the boards are shipped the long 
distances and the furniture and woodwork are manu- 
factured as near as possible to the market where they 
are to be sold. This illustration shows the influence, 
upon the location of the industry, of the principle regu- 
lating freight rates, viz., that of charging a higher rate 
as the goods become more valuable, only here it is the 
shipper who is concerned to make his freight bill as low 
as he can by shipping his raw materials at a low rate 
and selling his finished product, which must pay a high 
rate, near the factory. 

70. Tlie influence of climate upon the location of 
industry. — Climate has often a decisive influence upon 
the location of industry. For example, in all forms of 
spinning and weaving, the fibres of silk, wool or cotton 
can be manipulated much more readily and held to- 
gether more tenaciously in a moist atmosphere. So 
important is this influence of climate that in many New 
England mills, during dry weather, artificial means are 
used to keep the atmosphere of the mill humid. In the 
manufacture of cigarettes, on the other hand, a dry 
climate is considered necessary in order to preserve the 
flavor of the tobacco, which is impaired in damp air. 
Again, industries that are dependent upon the applica- 
tion of external heat, as for example, all forms of the 
iron and steel industry, try to avoid locating in a hot 
climate. For example, the iron and steel industry of 
Alabama is greatly handicapped because it must rely 
upon negro labor. The climate is too hot for white 
men to endure the additional heat of the iron or steel 
mill. 



102 ECONOMICS 

71. Perishability of materials an important influence 
on location.- — The perishability of the materials has 
often an important influence on the location of the in- 
dustry. For example, the juice of the sugar cane, if 
allowed to stand for a few hours, sours and spoils, and 
the sugar is lost. For this reason, and also because the 
canes must be crushed soon after they are cut, the sugar 
house must be located near the cane field. The canning 
of salmon, must, for the same reason, be carried on near 
the source of supply. The manufacture of butter and 
cheese illustrates the same principle. 

72. Supply of fuel or water power an important 
hearing on location. — The supply of fuel or of water 
power has an important bearing on the location of in- 
dustry. Water power is much cheaper than steam 
power and, for this reason, power industries centre about 
it. The supply of coal, however, is practically un- 
limited, while the supply of water power is quickly taken 
up, and coal can be carried long distances at compara- 
tively small cost. For these reasons, whenever an in- 
creasing demand greatly raises the rental or price of water 
power, industries tend to leave the water-falls and move 
toward the coal mines. Other things being equal, 
industries will always seek the location of the cheapest 
power. It is for these reasons that most of the cotton 
mills built in the United States in recent years have 
been erected in the South where the numerous rivers of 
that section fall from the highlands into the costal plain. 
The development of electric power transmission for 
long distances has widened the circle of location of in- 
dustries depending on electric power, and has given 
promise that, by its further development, water power 
of mountain and upland regions which is now unavail- 
able because of its location may some day be used. In 



LOCATION OF INDUSTRIES 103 

this connection it should be noted that in the vast 
majority of cases materials are moved down hill and the 
lighter products are taken back up the grade. Very 
few upland regions can be the seats of great industrial 
centres. 

73. Industries utilizing tcaste in'oducts. — Many in- 
dustries are calculated to utilize either the waste 
products or the surplus labor of other industries, and are, 
therefore, located close to them. Thus in Armour's 
packing plant there are fifty-two separate departments. 
The hoofs of the animals are made into glue, the largest 
glue factory in the world being located here. A large 
soap factory to utilize a portion of the oils and fats; a 
curled hair factory; a factory for the manufacture of 
brush handles, paper cutters and other bone articles; a 
factory for the manufacture of articles of horn, such as 
combs, buttons, etc. ; a fertilizer factory M^hich works up 
bones, ofFal and blood, and many other departments are 
included in this one business. An example of an 
industry so located as to utilize surplus labor is fur- 
nished by the presence of the silk industrj^ in the iron 
towns of eastern Pennsylvania. The women and girls 
who would otherwise be unemployed find work in the 
silk mills. 

74. Residence of consumer decisive factor in location 
of some industries. — The residence of the consumer is 
the decisive factor in the location of many industries. 
These are the so-called service-industries, such as shoe 
mending, barbering, etc., and all those industries that 
produce goods for the personal and individual inspec- 
tion of the consumer — such as tailoring, millinery, dress- 
making, photographing and newspapers. All indus- 
tries, finally, which can be carried on as well in one place 
as in another, and in the value of whose products trans- 



104 ECONOMICS 

portation cost does not figure largely, as a rule, seek the 
consumer. 

75. Specialization of labor a determining factor. — 
Specialization of labor is often a determining factor in 
locating an industry. A population, such as that of 
southern New England, for example, may have been 
trained for generations in particular occupations until 
it comes to acquire, often it would seem by inheritance, 
remarkable dexteritj^ in them. Knife and saw making, 
all kinds of brass work and other industries requiring 
a high order of skill, are chiefly carried on in Connecti- 
cut, for the reasons that here is the largest supply of 
highly skilled labor. This factor, however, is decreasing 
in importance with the increasing tendency of the people 
to move freely about the country and with the general 
spread of manual training and technical education. 

76. Cheapness of labor a decisive influence. — The 
cheapness of labor may be a decisive influence in the 
location of industries. This is most important in those 
industries which are still in a backward condition, that is 
to say, in which machinery has not seriously entered, 
and where, therefore, the cost of labor is of great im- 
portance. Such industries are the manufacture of 
clothing, linen, underwear, gloves, millinery and cigars. 
The most familiar of these in reference to the importance 
of cheap labor, is the manufacture of clothing. This is 
carried on principall}^ in the large cities, where it is given 
out by contract to men who hire the lowest grade of 
labor, usually foreigners, who are used to long hours 
and low wages at home, and who work often sixteen 
hours a day for thirty to fifty cents. This is called the 
"sweating system," and since it is justly considered to be 
highly injurious to public welfare, many laws have been 
directed against it, and some attempts have been made 



LOCATION OF INDUSTRIES 105 

to enforce these laws. These efforts have, as yet, been 
only partly successful. 

77. Changes in the location of industry. — As a 
general principle, industry may be said to arrange itself 
about definite centres where markets are largest and 
where the raw materials can be most easily assembled. 
The tendency is to scatter these centers over the country 
whenever a particular district has grown populous 
enough to afford a good market. The main reason is 
that which was explained at the beginning of this sec- 
tion — the lower freight charges on the raw material as 
compared with the finished product, which always makes 
it an object to a manufacturer to get as close as possible 
to his market. Only in those cases — to repeat a former 
statement — where the gain in the smaller weight of the 
product is more than sufficient to counterbalance the 
higher cost of transporting manufactured products does 
industry in its location cling to the raw material; and 
these industries are generally those in which the increased 
value resulting from the manufacturing operation is 
not great. A further influence working for the 
diffusion of industry in scattered groups over a wide 
area, is the general distribution of raw material. Tim- 
ber, iron, coal, copper, lead, clay, petroleum, stone, etc. 
are found in many places. Even those materials which 
are produced in one portion of the country are generally 
equidistant from many other portions, in some of which 
manufacturing cities are found, and some not. Take 
cotton, for example. The cotton fields of Arkansas are 
nearer to Kansas City than the cotton fields of North 
Carolina are to Fall River, Massachusetts, and yet, even 
to-day cotton goods are carried from Fall River and sold 
in Kansas City. This condition can only be temporary, 
and in the same way that we have seen the shoe industry 



106 ECONOMICS 

gi'ow up in the middle west, so, in the progress of om 
industrial development, will all the important branches 
of manufacture tend to follow the currents of popula- 
tion, finally locating where the markets are largest. 

78. IHtUhurgh as an illustrat'mn. — A striking 
example of the reasons for an industrial location, which 
will serve to conclude this section, is furnished by Pitts- 
burgh. This city is the centre and chief seat of the iron 
and steel trade of the United States. Nearly half the 
steel purchased in this country is made in Pittsburgh. 
In and around the city are more than 4,000 establish- 
ments engaged in the manufacture of iron and steel, 
and yet Pittsburgh has no workable iron beds nearer 
than 1,000 miles. It is from the iron mines of Lake 
Superior, owing to the purity and abundance of the ore 
which they produce, that substantially all the iron ore 
used in the Pittsburgh and adjoining districts is taken. 
It would seem, on the face of things, that Pittsburgh is 
not a desirable location for an industry whose source of 
supply is so far distant. 

Let us, however, consider the other elements in the 
problem. Pittsburgh lies almost equidistant from the 
great markets of the East and West. From this point, 
under present conditions, the majority of iron and steel 
consumers in the United States can be most easily 
reached. This cannot be said of a location at the head 
of Lake Superior and, according to the rule of freight 
charges, the transportation of the raw material is usually 
preferred to that of the finished product. But there 
are other reasons for the pre-eminence of Pittsburgh as 
an iron and steel centre. The iron industry requires 
large supplies of coal and gas. Pittsburgh is built upon 
a coal bed, while nearby are the natural gas fields of 
western Pennsjdvania. Fiu'thermore, and most im- 



LOCATION OF INDUSTRIES 107 

portant of all, just south of Pittsburgh lies the famous 
Connellsville coke region, where, from a basin thirty 
miles long by three wide, the coal is mined, out of 
which nearly all the coke used in iron smelting in the 
United States is made. 

79. Proximity to supiMes of cokiiig coaL — Coke con- 
sists of the fixed carbon of the coal with some of the 
carbon contained in the volatile matter. It is manu- 
factured by burning a coking coal in a closed receptacle 
until nearly all the gas has passed off, leaving the carbon 
in large sponge-like pieces made up of myriads of little 
carbon cells, and greatly increased in bulk. This coke 
makes the best fuel for iron smelting for reasons which 
will now be given. Iron ore, as we saw, is composed of 
rock material and pure iron in combination with oxygen. 
In iron smelting the object is to free the iron from the 
oxygen and the impurities associated with it. This is 
done by mixing with the iron ore, in a blast furnace, 
some kind of fuel and a quantity of limestone in 
alternate layers, setting the mass on fire, and forcing a 
blast of air through it to hasten combustion. The 
oxygen is released during the process of burning and 
unites with the carbon in the fuel, while the limestone 
melts and unites with the rock material in the iron ore, 
forming what is known as slag. The iron is thus set 
free and becomes liquid, gradually sinking to the bottom 
of the furnace, while the slag, being lighter than the 
molten iron, floats on top of the iron. At the bottom of 
the furnace, at periodical intervals, the slag and the iron 
can thus be drav/n off separately, and the iron can be 
run into sand molds and allowed to cool, when it is 
available for use. 

Coke, as compared with soft coal, makes the best fuel 
for this purpose of iron smelting for three reasons : ( 1 ) 



108 ECONOMICS 

It does not run together and make a cake as does soft 
coal, so that it offers no obstacle to the passage of the 
air blast up through the furnace ; { 2 ) it retains its shape 
in the furnace and holds up the great weight which rests 
upon it, thus making combustion more perfect; (3) 
owing to its cellular structure it offers a greater burning 
surface and so produces a greater heat than soft coal. 
Hard coal, although formerly much used, is now so 
expensive as to be out of reach. Connellsville coke is 
by far the best and purest coke made, and Pittsburgh 
is nearer than any other iron centre to the Connellsville 
field. Pittsburgh, then, at the present time, is the place 
at which, all things considered, the materials of iron and 
steel manufacture can be most cheaplj^ assembled, and 
from which the products can be most cheaply dis- 
tributed. Chicago, Cleveland and Buffalo are also 
important iron centres, but either because of distance 
from large markets or long rail transportation of 
material, they have not yet attained the position that 
Pittsburgh enjoys, although, as the demand for steel in 
the West increases, that section will develop a much 
larger steel industry than it has at. present. The United 
States Steel Corporation, recognizing the advantage of 
proximity of the mill to the rapidly growing markets 
of the West, has erected a group of si eel-making plants 
at Gary, near Chicago, and another group of mills is 
projected for Duluth. 



CHAPTER X 

LARGE-SCALE PRODUCTION 

80. Large-scale production defined. — Large-scale 
production is an indefinite term and in reality is merely 
relative. A process that would be classed as large-scale 
production in one generation would not be so classed in 
the next, because of improved methods; and further, 
it is impossible to say when small-scale production ceases 
and large-scale production commences in any given case. 
We may broadly define large-scale production as pro- 
duction which is carried on with sufficient capital to 
enable the producers to employ all of the most modern 
appliances and methods to facilitate and cheapen pro- 
duction. It now characterizes most of the leading in- 
dustries in the iron industry of the United States. 

Iron ore was discovered in the Lake Superior region 
when the iron industry of the country was already 
centered at Pittsburgh. Instead of moving the industry 
from Pittsburgh, the coal supply, to the Great Lakes, 
the iron supply, the manufacturers of iron chose to 
transport the iron to the coal district. The problem 
was, therefore, the cheap transportation of the iron ore 
to Pittsburgh. Steamboats carried the ore down the 
lakes to Conneaut at the foot of Lake Erie, and the ore 
was unloaded from the boats with wheelbarrows and 
shovels. Such a method would be characterized as 
small-scale production. To-day iron ore is dug from 
some of the ore fields with a steam shovel, just as dirt 
is dug out of a railroad cut. The steam shovel throws 

10» 



110 ECONO^MICS 

the ore on the cars, which are hauled to the lake and the 
contents emptied into a high ore wharf. From this 
wharf the iron ore is dropped through chutes into the 
hold of the ore ships. In all of these processes no 
muscular energy has been devoted to lifting the iron 
(»re. All of the work lias been done by mechanical 
means. 

The ore vessel proceeds to the lower lake ports, where 
special electric machinery operates huge grab buckets 
which drop into the hold of the ship, scoop up from six 
to ten tons of ore at once, and carry it to the cars waiting 
to convey it to Pittsburgh. By means of these grabs 
working on a modern ship, ten thousand tons of ore have 
been transferred from the vessel to the cars in six hours. 
The process of unloading the ore reduces the cost to the 
Sinn of two cents a ton, a price impossible to the small- 
scale producer, performing the work by hand labor. 

Large-scale production is of comparatively modern 
development. It has been developed during the last 
quarter of the Nineteenth Century because the great ag- 
gregations of capital have made possi])le the installation, 
of the mechanical appliances on which large-scale pro- 
duction so intimately depends. 

81. Centralization of y;/*o^i/c//o?z. -^Large-scale pro- 
duction means a ..centralization of larger amounts of 
capital, of more wage workers and of a greater product 
in fewer and fewer establishments. Instances showing 
this development can be picked from the tables almost 
at random. For example, the cotton goods industry ha;l 
in 1850 a capital of $74,500,000; it employed 92,280 
v/age earners and produced $61,900,000 worth of prod- 
uct in 1,094 establishments. By 1870 the capital had 
increased to $140,700,000, the number of wage workers 
to 135,369, the product to $177,500,000, while the num- 



LARGE SCALE PRODUCTION 111 

ber of establishments had decreased to 956. In 1909, 
forty years later, while the amount of capital invested 
was $822,238,000, the number of wage workers em- 
ployed, 378,880, and the amount of the product, $628,- 
392,000, the number of establishments had increased 
only to 1,324. 

The same centralization is shown in the slaughtering 
and packing industry. In 1880 the capital invested in 
this field was $49,419,000, and the number of wage 
workers employed 27,000, the value of the product 
$303,562,000. In 1909 the capital invested was $383,- 
249,000, the number of wage workers 90,000, the amount 
of product $1,370,568,000. In this case the value of the 
product in 1909 was more than four times that in 1880, 
and the increase in the number of establishments dinging 
this period of thirty years was from 872 to 1,641, or only 
100 per cent. 

The conditions in the iron industry are particularly 
interesting, for there large-scale production has been 
brought to its highest perfection. In 1870 the produc- 
tion of pig iron employed $56,145,000 in capital and 
27,000 wage earners. The value of the product was 
$69,640,000 and the number of establishments engaged 
in the. industry 386. While there was a steady increase 
in the amount of capital and in the value of the product, 
the number of wage earners was 41,000 in 1880, 33,000 
in 1890, and 39,000 in 1900, and 38,429 in 1909. Large 
scale production in the pig iron business is being carried 
on with a decreasing amount of human labor. The num- 
ber of establishments was 341 in 1880, 304 in 1890 and 
208 in 1909, or a little more than half the number in 
1870. The capital invested was $487,581,000, or nine 
times the amount in 1870, and the value of the product 
was $391,429,000, or five and one-half times 1870. 



112 ECONOMICS 

Numerous other industries which have developed 
large-scale production might be cited to show a decrease 
in the number of establishments, and a small increase in 
the number of wage workers, side by side with a vast 
growth in capital and in the value of the product. 

82. Economies of large-scale production. — -The cause 
of the wonderful growth of large-scale production lies 
in the manifold advantages of this system of production 
over that which it displaced. Large-scale production 
makes possible a full utilization of the benefits arising 
from the division of labor. 

In some cases it is only possible to produce cheaply 
if the division of labor is very considerable. Thus, in 
the departments of a large meat packing house, division 
of labor is carried to a great extreme, each man in turn 
performing one single operation on the animals, fre- 
quently not more than a single cut. A similar policy 
is followed by the large agricultural implement makers. 
In the boot and shoe industry there is both highly spe- 
cialized machinery and considerable division of labor, but 
the fact that much of the machinery can be leased from 
the United Shoe Machinery Company for a rent of so 
much per pair of shoes made, enables the small manufac- 
turer to produce under conditions almost as favorable as 
the large one. It permits the economical utilization of 
expensive machinery and equipment which the small 
scale producer cannot afford, or which it would not pay 
him to have because his small business would not keep it 
continuously employed. 

In industries in which elaborate and expensive ma- 
chinery is required, if production is to be conducted 
economically, there is no place for the small concern. 
This is particularly true of the iron and steel industries. 
The minimum capital expenditure for the equipment of 



LARGE-SCALE PRODUCTION 113 

blast furnaces is high but in addition to this a very large 
outlay can be incurred in providing mechanical facilities 
for the handling of the heavy raw materials and finished 
products. Some of these mechanical facilities are 
essential and others are undoubtedly economical, though 
it may be possible to establish a plant on a paying basis 
without them. 

83. Other advantages of large-scale p'oduction. — 
A third advantage of large-scale production is in con- 
nection with the purchase of materials and the sale of 
products. Large-scale producers can make a better use 
of bj^-products. In the mineral oil and the meat packing 
industries large-scale production has made possible the 
utilization of waste products to an extent undreamed of 
when these businesses were carried on by small concerns. 

A fifth advantage is found in the large expenditures 
which a large-scale producer is able to make in experi- 
ments looking to the improvement of the technique of 
production. In businesses which are changing their 
methods continuously, to be the first to introduce a valu- 
able innovation means often the difference between 
success and failure. Many of the manufacturing 
establishments which have been most successful in the 
United States in recent years, such as the Carnegie Steel 
Companj^ of Pittsburgh, have owed their success, in no 
small degree, to their lavish expenditures on industrial 
experiments, and to the installation of new machinery 
as soon as ite superiority to that in use has been demon- 
strated. 

Running through all these various economies lies the 
important economy of reducing the cost of fixed 
charges in proportion to the total value of the product. 
The savings to be effected in fixed charges, owing to an 
increase in the scale of production, are bj^ no means negli- 
I-s 



114 ECONOMICS 

gible, though hardly sufficient by themselves to render 
production in a well-equipped, though small factory, 
remunerative. It is chiefly in the cost of buildings, 
power and superintendence that the large producer can 
hope to save, but even these economies appear to cease at 
a certain point, and frequently a Arm will build and 
equip two or three moderate-sized mills rather than one 
very large one. 

84. Essential differences bettoeen large and small 
concerns. — In almost every class of industry there are 
large and small concerns, and the important point to 
determine is in what way they differ from each other. 
Cienerally large concerns consist of a combination of 
small undertakings, either similar or dissimilar. Thus 
a large cotton spinning mill with 100,000 spindles is 
practically the equivalent of two mills with 50,000 
spindles each. In this case the large concern is merely 
reduplicating the fimctions of a small concern, and if 
the latter is conducted on a scale which permits of 
efficient and profitable production, any small savings the 
former may effect by increasing the scale of production 
will probably be counteracted by loss occasioned through 
the absence of personal supervision. 

On the other hand, a large meat packing factory is not 
a mere compilation of small meat packing factories. 
The former itself performs several functions which the 
latter has to have done for it. Thus the big packer 
does a great deal of his own preliminary subsidiary 
work; recovers sufficient by-products to make it worth 
his while to manufacture them into finished articles, and 
establishes an elaborate system for the distribution of 
his products. 

85. Broadening the scope of business operations. — 
Frequently, when a manufacturer increases the size of his 



LAKGE-SCALE PRODUCTION 115 

plant there appears to be a tendency for him to under- 
take new functions. In this way, he hopes the work will 
be done better, or more cheaply or both. When his 
scale of manufacturing is such that an increased per- 
formance of one function is not likely to lead to a more 
than nominal increase of profits, the producer is likely to 
turn his energies in other directions, and in particular 
to undertake commercial functions, as it is almost always 
possible to effect economies along these lines, if the 
manufacturer produces on a sufficiently large scale. On 
the one hand, he hopes to reduce the cost of selling, and 
on the other, to secure a safer hold on the market, which 
may lead to a quasi-monopoly. This is only practicable 
when the goods bear a trade-mark or are made up in 
easily distinguishable packages, and are alwaj^s sold 
under a particular name. If the manufacturer obtains 
a fairly secure hold on the market, he may be able to 
keep up prices, should the cost of production fall, or even 
raise the price, if he cannot increase his profits in any 
other way. This latter expedient, however, is a some- 
what risky proceeding and may lead to a revulsion of 
public feeling such as broke up the English soap trust 
after it had existed three weeks in the autumn of 1906. 
86. Causes of the development of large scale produc- 
tion. — It now remains to state the chief causes of the 
development of large scale production: 

1. The invention of machinery and mechanical devices 
to take the place of human muscular power. 

2. The application of steam to industry is an essential 
part of the development of inventions and mechanical 
appliances, because mechanical appliances would be use- 
less without some kind of a power to drive them. In 
this application of steam to industry is included the de- 
velopment of the steamboat and the railroad ^ud tJiQ 



116 ECONOMICS 

various kinds of factory machinery which have played 
so large a part in industrial development. 

3. The development of labor saving machinery. 
While falling more or less under the first two headings, 
this third group is in a measure distinctive because, 
while in many countries power is applied to industry, in 
no country perhaps has labor saving machinery been 
so highly developed as in the United States. 

4. The development through immigration of a large 
unskilled labor force. Great numbers of immigrant 
laborers began to come to the United States in the middle 
of the Nineteenth Century, and with the exception of a 
few intermittent periods, immigrants have been coming 
in large numbers ever since. The building of railroads, 
the development of manufacturing, in fact, the growth 
of most American industries have been carried on by this 
cheap foreign labor. 

All of these factors combined have developed a 
transportation system without which the large scale pro- 
duction of the country would be impossible. For 
example, without improved methods of packing and 
rapid freight transportation it would be impossible to 
produce the meat that Chicago sends all over the world. 
Without cheap transportation the fruit grown in the 
West would not be sent to the East to feed the manu- 
facturing population. 

Large-scale production is dependent for its existence 
primarily upon mechanical power and mechanical 
ingenuity. It is a growth in business organization that 
owes its existence to the presence of ingenuity and or- 
ganizing ability in the lal)or force. 

Modern production tends to become concentrated in Targe 
establishments for the reason that it can be carried on most 



LARGE-SCALE rilODUCTION 117 

economically in that manner. Large-scale production may se- 
cure the following economies : 

1. Economy in fixed capital. Modern machinery is expen- 
sive, and requires expensive factory buildings. Machine pro- 
duction, therefore, necessitates a very large outlay for fixed 
capital ; and this element of investment tends to increase each 
year. The statistics just presented show that, in the United 
States, the average amount of capital invested in a manufac- 
turing establishment was about four and a half times as great 
in 1890 as it was in 1850, while at the same time the average 
number of laborers employed is less than twice as large. In 
the textile industries they show that, while the amount of capital 
invested in the average establishment has increased to five times 
the figures for 1850, the average number of laborers employed 
has increased less than three times. In the iron and steel indus- 
tries it appears that the average investment of capital is nearly 
four times as large as it was thirty years ago, while the average 
number of employes is only two and one-half times as large. 
It is evident, therefore, that the cost of fixed capital is an increas- 
ing element in the cost of production. Now the cost of the 
fixed capital often does not increase proportionately as the 
product of the factory increases. For this reason such costs 
are termed the "fixed charges" of a business, since within certain 
limits they do not vary much, as the amount of business is larger 
or smaller. One large building may cost less than two small 
ones, while it may furnish room for the same amount of machin- 
ery. Generally a smaller expenditure for engines and other 
machinery will enable one large factory to turn out as large a 
product as two small ones. This is because no machine is need- 
lessly duplicated in the large factory, while in the two smaller 
factories some of the machinery may be only half utilized for a 
considerable portion of the time. This often happens when 
costly machinery is required to perform some short operation, 
and would remain idle much of each day in a small factory where 
the product Is not large enough to keep the machine constantly 
employed. Steam railroads, gas and electric-light works, and 
street railways are the most common illustrations of businesses 



118 ECONOiMICS 

that require very large outlays of fixed capital. In these indus- 
tries one company can, manifestly, supply the same territory 
with very much less unnecessary reduplication of tracks, gas 
pipes, electric wires, etc., than two companies would require. 
But the same thing is true, although sometimes to a less extent, 
of giant factories in which hundreds of thousands or even sev- 
eral millions of dollars are invested in land, buildings, and ex- 
pensive machinery. In general, it may be, said, that the larger 
the outlay of fixed capital, the greater are the economies that 
result from the concentration of production in a small number 
of large establishments. If the annual expenses for interest 
and replacement of fixed capital are $^00,000 in any business, 
and the product is $1,000,000, then the costs of the fixed capital 
will be thirty cents for each dollar of product. Now if the 
output of the business be increased to $1,500,000 by merely 
utilizing the machinery to the greatest degree possible, then the 
costs of the fixed capital will be only twenty cents. 

2. Economy may also be effected in the circulating capital. 
Less coal or lubricating oil may be required in one large factory 
than in two small ones. A large store need not have on hand 
at all times twice the stock of finished products that two small 
stores may require in order to enable them to meet any probable 
demand of their customers. 

3. In experimenting w ith new methods and inventing new ma- 
chinery, a large concern has a great advantage over a small 
one. Invention and experiment are often expensive processes 
which only a business possessed of large capital can afford. 
Some large concerns keep scientists and inventors at work en- 
deavoring to improve the processes by which production is car- 
ried on. 

4>. Large-scale production often results in an economy of 
skill. Labor can be much more efficiently subdivided in a large 
business undertaking. Out of a great number of employes 
men of exceptional talents can be selected for the particular 
lines of work for which they are best fitted. A high specializa- 
tion of work and a greater efficiency in the application of labor 
can be secured in this way. Sometimes an absolute saving may 



LARGE-SCALE PRODUCTION 119 

be eifected in the amount of labor required to do the same work. 
It is said that a steamer of two hundred or three hundred tons' 
burden needs one sailor for every 19.8 tons of cargo carried, 
while a steamer of eight hundred to one thousand tons requires 
only one sailor for each 41.5 tons. In many departments of 
production only a portion of the raw materials can be used for 
the purpose of producing the main products of each business. 
A considerable part of the raw material becomes waste unless 
some means can be found to utilize it. In a large business the 
amount of waste material is very great, and the incentive for 
saving it is correspondingly increased. In refining petroleum, 
material which was formerly wasted is now utilized for the pro- 
duction of lubricating oil, naphtha, and paraffine. So in the 
business of beef and pork packing, a more complete utilization 
of every part of the animal is eifected in large establishments 
than could be secured in any other way. Hides, hoofs, horns, 
bones, blood, bristles, hair, are utilized in the production of 
leather, glue, fertilizers, etc. 

5. Large business establishments can effect savings by carry- 
ing on for themselves allied or subsidiary processes. Large oil 
refiners make their own barrels, tin cans, tanks, pumps, sulphuric 
acid, etc. Large sugar refiners import their own raw sugar, own 
their own wharves and warehouses, and make their own barrels 
and boxes. ^ 
1 C. J. Bullock, " Introduction to the Study of Economics," pp. 178-181. 



PART II: EXCHANGE 

CHAPTER I 

MEDIA OF EXCHANGE 

87. Necessity for excliange. — We have seen how the 
efficiency of production is increased by the division of 
labor and the speciahzation of employment. The 
average output of the individuals — men, women and 
children — employed in the manufacturing industry in 
the United States in 1909 was $3,125, many times the 
value of the commodities which could have been pro- 
duced by each man acting for himself, and singly per- 
forming all the operations which are now parceled out 
among thousands of workers scattered all over the 
world. 

In order that each producer should be able to confine 
himself exclusively to one pursuit, that he should be 
permitted to devote his entire time to performing one 
operation out of a long series, to spend his days, for 
example, in polishing a saw or vamping a shoe, he must 
be able to exchange the product of his labor for the prod- 
ucts of the labor of others. Everyone, no matter how 
simple his existence, .needs a great variety of com- 
modities. He cannot give his whole strength and time to 
making horseshoes or axe helves, unless he can in some 
way exchange these products for the products of the 
labor of others. This the organization of modern in- 
dustrial society enables him to accomplish. By the in- 
stitution of exchange, a great variety of occupations and 

120 



MEDIA OF EXCHANGE 121 

industries can be pursued by different people, at differ- 
ent times and in different places, each one giving his 
undivided attention to one operation, and exchanging 
what he produces for the manifold products and services 
which he requires. 

88. Two forms of exchange. — Exchange may assume 
two forms: Direct exchange, which is called barter, 
where commodities are exchanged each for every other, 
as shoes for cloth, and indirect exchange accomplished 
through the instrumentality of the medium of exchange 
which is called money. 

The first method, although employed on a limited 
scale, is so difficult and inconvenient that it may be con- 
sidered entirely unavailable. The inconvenience of bar- 
ter as a means of exchange arises from the lack of 
coincidence between exchanges which it involves. The 
shoemaker produces three pairs of shoes, and wishes to 
buy with them five yards of cloth. The cloth maker 
may not want shoes at that time, and in consequence 
the shoemaker's demand for cloth must go unsatis- 
fied. This is an example of lack of coincidence in time. 
The anthracite coal miners use a large amount of sugar, 
but the sugar producers, living in a warm country, do 
not need fuel. It would be impossible, therefore, for 
this need of the miner for sugar to be satisfied by the 
method of barter. This is an example of the lack of co- 
incidence in place. The silk manufacturers use a large 
amount of iron and steel in constructing their mills, but 
the f amihes of the operatives in iron and steel mills use 
only a small amount of silk. Here is a lack of coinci- 
dence in products. 

It is then apparent that the direct method of ex- 
change, the method of barter, breaks down at every 
point. The inconveniences of barter, if men were 



122 ECONOMICS 

forced to resort to this method, would be so great as 
to more than offset all the advantages to be derived 
from the division of labor. Rather than rely upon 
barter, with its enormous loss of time, to supply him, 
in exchange for the results of his own labor, with the 
products of the la})or of others, every man would prefer 
to make everything which he needed for himself. Di- 
vision of labor, in other words, if barter were the only 
device open to exchangers, would be impossible. 

89. Medium of ejcchauge. — The inconvenience of 
barter, at an early period of civilization led to the intro- 
duction of a medium of exchange. It was early dis- 
covered that some commodity, such as cattle or sheep 
or iron, was in universal demand; that every producer 
needed this commodity at all times and was willing to 
give something in exchange for it. It, therefore, came 
about, in every country where exchanges were carried 
on, that some one commodity was fixed upon as the 
medium of exchange ; i. e., as the good for which every 
one was Mailing to give that which he had for sale, 
because he knew that he could, in his turn, pass this com- 
modity on to other producers in exchange for their 
products and services which he might require. By the 
selection of a medium of exchange the inconveniences 
of barter were entirely avoided. Every one exchanged 
his goods for the medium of exchange, and he kept this 
by him until he should have occasion to purchase some- 
thing from another. The second party would in his turn 
gladty receive the commodity which was in universal 
demand, not to consume it himself, but to pass it on to 
others in further exchanges. The functions of money 
in exchange are as follows: Money serves as (1) a 
medimn of exchange; (2) a common denominator of 
values, all commodities being placed on a basis by which 



MEDIA OF EXCHANGE 123 

their value can be compared, by expressing them in 
terms of money; (3) a store of value; (4) a standard 
of deferred payments by which is meant that loan con- 
tracts are drawn in terms of money. 

90. Commodities used as medium of eccchange. — 
JNIany things have been used as money in different 
stages of civilizatiouo Among savage tribes, the skins 
of animals have frequently served as money; among 
fishing tribes, dried fish forrned the medium of ex- 
change; among pastoral peoples, flocks and herds fur- 
nished that which best served as money. The early 
Latin tribes counted their cattle by the head (per cap- 
ita) and from this is derived the modern expression 
"capital." In agricultural communities, wheat, maize, 
cocoanuts and tea have at different times served as the 
medium of exchange. All these commodities con- 
formed to some of the requirements of a good medium 
of exchange; they all existed in sufficient quantities to 
enable them to serve this purpose, and they were uni- 
versally acceptable in the places where they were used. 
They had, however, certain drawbacks which rendered 
them unavailable in a society where a large amount of 
exchanging was carried on, 

91. Characteristics' of a medium of eccchange. — A 
commodity to serve as money must not only exist in 
large quantities, and be in universal demand, but it 
must admit of division into units. A great variety of 
commodities will be offered in exchange for the medium 
of exchange — wheat, corn, eggs, cattle, iron, etc. 
These commodities are of different weights and values. 
The medium of exchange must be able to accommodate 
itself to the great variety of conditions which is here 
presented. A man must be able to exchange a dozen 
eggs for the medium of exchange, and he must be able 



1J24 ECONOMICS 

to exchange his farm or his house for the same com- 
modity. Furthermore, the commodity which serves as 
the medium of exchange, which we will hereafter term 
"the money commodity," must be uniform in quality 
so that everyone can be able to estimate the value of 
that which he has, in terms of the money commodity. 
The money commodity must likewise be durable, so as 
to protect it from decay. Finally, the money com- 
modity must be portable, that is to say, it must unite 
large value with small bulk so that it can be carried 
about and used for exchanges in different places. 

As a result of the experience of mankind, it has been 
found that the precious metals are best qualified to 
serve as money, and gold and silver have come gradually 
into universal use. Under modern conditions, these 
metals are nmch better adapted to serve as money than 
any other material. They are universally acceptable, 
they are uniform in quality, and they can be accurately 
divided into pieces of desired size; they are durable, 
they unite great value in small bulk and a large quan- 
tity of them is in existence. Gold and silver, further- 
more, can be manufactured into coins — pieces of metal 
shaped and stamped — so as to prevent counterfeiting 
and to give the certification of the government as to 
their weight and fineness. 



CHAPTER II 

MONEY SYSTEM OF THE UNITED STATES 

92. The unit of value. — Passing now from the gen- 
eral discussion of money, let us consider in more detail 
the monetary system of the United States — the medium 
of exchange that the American people use in their trans- 
actions. The basis of the American monetary system 
is the dollar. In England the money unit is known 
as the pound sterling ; in Austria it is the crown ; in 
Russia it is the ruble; in Italy it is the lira; in Spain 
it is the peso; in France it is the franc; in Germany, 
the mark. Each one of these terms signifies a certain 
weight of gold or silver. In the United States the 
dollar is 23.22 grains of fine gold, formed into a coin 
and stamped in a particular manner in the government 
mint. This dollar is the unit of value in our monetary 
system. Everyone who has anything to sell exchanges 
his products for dollars. He thinks of the value of these 
commodities in terms of dollars. The object of every 
man in business is to accumulate as large an amount of 
property expressed in terms of dollars as is possible. 
The entire business thinking of the United States is done 
in terms of this monetary unit. 

93. Kinds of American money. — Besides the gold 
dollar, however, there are many other kinds of money 
in the United States. There are four kinds of gold coin ; 
the two-dollar-and-a-half piece, the $5 piece, the $10 
piece, and the $20 piece. The $20 piece contains twenty 
times the weight of gold contained in the dollar ; the $5 

125 



126 ECONOMICS 

piece, five times; and the quarter eagle, or $2.50, con- 
tains two and one-half times the amount of gold con- 
tained in the dollar. We have also in our monetary 
system several silver coins — the silver dollar, the half- 
dollar, the quarter and the dime; and we have minor 
coins, such as nickels and pennies, which aje convenient 
along with the smaller silver coins in making change. 

Besides this metallic money, there is in circulation a 
large amount of paper money known as the gold cer- 
tificate, the silver certificate, the United States note or 
greenback, and the national bank note. These are 
issued in denominations of one dollar, two dollars, five, 
ten, twenty, fifty, one hundred, and (gold certificates) 
five hundred, one thousand, five thousand, ten thousand. 

Each of these paper certificates is an express or im- 
plied promise of the government or of some bank backed 
up by the government, to deliver to the bearer the num- 
ber of dollars, i. e., gold dollars — which is named in 
the certificate. For our present purpose, it is of no 
importance to distinguish between the various kinds of 
paper money, except to point out, as already suggested 
above, that paper money in the United States may be 
divided into two classes : (1) Certificates issued by the 
government and calling for redemption in metallic 
money, either gold or silver, the silver being also re- 
deemable in gold, and (2) certificates issued by banks 
and calling for payment in any kind of lawful money 
of the United States. 

94. The equal value of imper money and coin. — 
Leaving the further analysis of our monetary system 
for a later stage of the discussion, it is important now 
to observe what has come within the observation of 
everyone, that all parts of our monetary system are of 
equal value; that in common practice no greater im- 



THE MONEY SYSTEM 127 

portance is attached to gold than to silver, and no 
greater importance to silver than to paper. In fact, 
the average business man objects to gold and silver 
coins. They are inconvenient to carry about and awk- 
ward to handle. He prefers some kind of paper money. 
It is evident, however, that the paper in itself has no 
value, and it should further be remarked that the silver 
dollars which are taken equally with gold and which, in 
fact, are more frequently met with in common circula- 
tion, are worth as bullion less than half of the value 
which is expressed upon their faces. In view of this 
fact, it is necessary to explain the universal accepta- 
bility of these paper certificates, which form the ordi- 
nary currency of the American people. 

The explanation is simple; Paper money is taken as 
equivalent to gold because for all practical purposes 
it is equivalent to gold. By going through certain for- 
malities every paper dollar now in existence in the 
United States can be exchanged for gold coins. The 
government, when application is made, will redeem any 
one of its promises to pay gold, according to the terms 
of the promise. There is, therefore, a universal con- 
fidence, although this confidence is not probably present 
in the minds of many exchangers at any given time, 
in the willingness and the ability of the government to 
maintain, through this process of redemption, all forms 
of paper money at par with gold. 

•-95. Government guarantees. — The government also 
undertakes to maintain the national bank notes, familiar 
to us as five and ten dollar bills, on an equality with 
gold. Every bank is, as stated above, required to re- 
deem its notes at its counter in lawful money of the 
United States, and lest the bank should become insol- 
vent and unable to meet its obligations, the government 



128 ECONOMICS 

has on deposit at Washington an amount of govern- 
ment bonds equal to the amount of national bank notes 
outstanding in the hands of the people. If any bank 
fails to redeem its notes, the Treasury Department will 
sell these bonds and make the redemption. 

The people have confidence in'the ability and willing- 
ness of the government to keep all kinds of money 
which it issues at par with gold for three reasons : ( 1 ) 
Because the government has publicly declared its inten- 
tion to redeem its promises to pay gold, according to 
the terms of the promise, and because this redemp- 
tion is actually going on at all times; (2) because the 
government keeps in its vaults a reserve of gold coin 
and bullion which is never allowed to fall below $150,- 
000,000. This is the visible evidence and support of the 
government's guarantee of redemption; (3) because 
the people know that in case their reserve should prove 
insufficient to redeem the paper it has presented for 
redemption, the government may obtain, through its 
borrowing power, any quantity of gold which may be 
needed. During the second administration of Presi- 
dent Cleveland, $262,000,000 of government bonds 
were sold in order to obtain the means of redemption. 
On the basis of this confidence in the willingness and 
the ability of the government to make good its prom- 
ises, the stability of our monetary sj^stem rests and by 
it the equal acceptance of all kinds of money by every 
exchanger is assured. 

96. Bi-mctalism. — In the United States, the basis 
of the monetary system is the standard dollar, composed 
of 23. 22 grains of gold. This is the money of ultimate 
redemption. Until 1873 the dollar was either 23.22 
grains of gold or 371^1 grains of silver. Until 1873, 
the United States Mint could coin either 23.22 grains 



THE MONEY SYSTEM 129 

of gold or 371% grains of silver into a piece of money 
which would be called a dollar. The law of the United 
States provided that the creditor must accept either gold 
or silver dollars in payment of his obligation. This 
was what is called the double or bi-metallic standard. 
At different times, it has prevailed in every civilized 
country. This double standard may, however, be an 
alternating standard. 

The precious metals have two uses, first as bullion 
in the arts, and second as coin. Their bullion value is 
regulated by the market, their legal ratio by law. 
When one ounce of gold exchanges in the market for 
seventeen or eighteen ounces of silver there is an in- 
ducement to buy silver for coinage and to melt down 
gold coin for sale in the bullion market. The supply 
of silver for the bullion market is, therefore, decreased 
and the supply of gold increased. If the increased de- 
mand for silver for coinage purposes and the increased 
supply of gold for the arts, at such a time, lowers the 
value of gold and raises the value of silver until the 
legal and market ratio again correspond, before gold 
has all been withdrawn from circulation, the double 
standard will be maintained, gold and silver circulating 
together. If all the gold retires from circulation, how- 
ever, without restoring the legal ratio, the country in 
which this takes place will be on a silver basis. 

97. Abandonment of the double standard. — The 
double standard was maintained in most European 
countries until after 1871. England had adopted the 
gold standard in 1816. In 1871, however, Germany 
ceased to coin silver as standard money; silver thalers 
were still coined, but they were limited in amount by 
the government and they were redeemed in gold. The 
action of Germany was followed by most of the other 

1—9 



130 ECONOMICS 

European nations. In 1873 also the United States 
dropped the silver dollar from the list of standard coins, 
and in spite of a violent political agitation lasting from 
1876 to 1896, which resulted in the purchase and coin- 
age of a vast amount of silver token coins, the gold 
standard of redemption has been maintained. The 
money question is no longer a subject of political con- 
troversy. 

The effect of this general refusal of the civilized 
world to longer coin silver at a fixed ratio with gold 
when presented at the Mint was to change from the 
double standard, so-called, to the single gold standard. 
The effect of this general rejection of silver was to 
lessen the demand for silver which in time resulted in 
a decline of 50 per cent in its price. Bi-metallism, 
properly speaking, no longer exists. A few nations, 
China being the most important, still adliere to the sil- 
ver standard. It is expected that before many years 
the entire world will have adopted gold as a basis for 
its monetary system. 

98. Inconvertible jjaper. — When these paper prom- 
ises to pay money are redeemed according to the terms 
of the promises, the paper money is called convertible. 
When redemption is refused, however, the paper 
is called inconvertible paper. It has frequently hap- 
pened that in order to obtain a forced loan without 
interest from the public, governments have issued 
promises to pay in the form of paper money without 
making any provision to redeem the promise. The 
money is accepted by the public and commodities and 
services are given in exchange for it. The only expense 
in putting it out is the expense of the paper and print- 
ing, and it has been considered by some persons as a 
most economic method of raising funds. 



THE MONEY SYSTEM ,131 

When paper money is inconvertible, it usually circu- 
lates at a discount, the amount of discount depending 
upon the number of notes outstanding and the pros- 
pects for their redemption according to the terms of 
the promise. The effect of this fall in the value of 
money is to raise prices, and, as the conditions affect- 
ing this value are constantly changing, the valuation 
of money and the prices of commodities under a system 
of inconvertible paper are subject to incessant fluctua- 
tions. The result of these fluctuations is to disturb 
business and, therefore, because it makes all future cal- 
culations uncertain, inconvertible paper money increases 
the risk and hazard of commercial operations. If these 
notes are made legal tender, which usually happens; 
that is to say, if the creditor is required by law to ac- 
cept them in payment, the effect of the inevitable fall 
in th& gold value of the paper money will be to inflict 
heavy losses upon the creditor who may have loaned 
money before the issue of the inconvertible paper. 
Working men also suffer from its issue, because their 
wages change slowly while the prices of that which 
they buy rapidly advance. In other words, the purchas- 
ing power of wages declines. 

Foreign commerce is also disturbed by the issue of 
inconvertible paper and sellers must first establish 
prices in gold and silver which are out of circulation, 
because although they are worth no more than paper 
for debt-paying purposes, they are worth much more 
as buUion. After making this double calculation, the 
man engaged in foreign trade must then find out what 
gold and silver are worth in paper, since the value of 
paper is constantly changing. The result of this cal- 
culation is always uncertain, and this seriously inter- 
feres with foreign commerce. 



132 ECONOMICS 

99. Paper money issues during the Civil War. — All 
the effects of inconvertible paper which have been men- 
tioned were experienced by the United States during 
and after the Civil War. In order to obtain funds for 
the payment of the troops, paper money was first issued, 
as a war measure, in 1862. Gold immediately disap- 
peared from circulation because these promises to pay 
gold were not redeemed according to the terms of the 
promise, and no one would give gold in exchange for 
them, if the government refused to do this. The coun- 
try was on a paper basis until 1879. The value of the 
dollar as a result of the general uncertainty as to re- 
demption and in part, also, of the successive issues 
which raised the amount outstanding at one time to, 
nearly $500,000,000 fell in 1864 below forty cents in 
gold. 

The results of this issue of depreciated paper are now 
generally admitted to have been bad and the issue itself 
unnecessary. Prices rose to enormous figures, and bus- 
iness was carried on under highly speculative condi- 
tions, the value of the wages of workingmen and 
soldiers was seriously reduced, and foreign trade was 
greatly disturbed. 

In 1876, after a bill providing for an indefinite con- 
tinuation of the system of issuing paper had been 
vetoed by President Grant, Congress passed a law that 
on January 1, 1879, all paper should be redeemed in 
gold, and authorizing the Secretary of the Treasury 
to collect a fund of gold for this purpose. In accord- 
ance with the act of Congress, Secretary Sherman col- 
lected a large redemption fund, and on the date specified 
redemption or "resumption" as it was called, was suc- 
cessfully accomplished. Since that time paper money 
has been kept at par with gold. 



CHAPTER III 

CREDIT 

100. Credit defined. — It cannot have escaped the ob- 
servation of every one who has had money to pay or to 
receive, that the amount of actual cash which comes into 
his hands is very much less than the amount of money 
which is represented by the bank checks and drafts 
which he receives. Every business man knows from 
his experience that probably nine-tenths, or at any rate a 
large proportion of his purchases and sales, are made by 
the use of these so-called "credit instruments." Some 
large business concerns never receive or pay a dollar in 
cash. It is, therefore, necessary in concluding our dis- 
cussion of the media of exchange to take account of 
credit — the most important element. 

Credit may be defined as a promise or contract to 
pay money on demand or at a future time. This prom- 
ise takes various forms. A promissory note is perhaps 
more familiar to the average man than any other form 
of credit. An accepted draft is another form; a book 
account is a third, and a bank deposit is a fourth. 
These promises to pay money are given in exchange 
either for commodities, as when a man buys a horse 
and gives his note for sixty days for the purchase price, 
or where a farmer sells his cattle to a commission house 
and draws a draft upon the purchaser, instructing him 
to pay to a third party the amount due. Or these prom- 
ises to pay money may be given in exchange for money, 
as where a manufacturer borrows $10,000 to pay wages 

133 



154 ECONOMICS 

and gives his note at three months to the lender to 
secure the return of the money. The most universal 
kind of credit, however, although a form least under- 
stood by the average man, is bank credit, which is rep- 
resented by bank deposits. 

101. Functio7is of a hank. — A bank is an institution 
engaged in the safe keeping of money and other val- 
uables, in transmitting funds from one place to another, 
in making loans and in buying promises to pay money 
in exchange either for money or for its own promise 
to pay money. These are the important functions of 
a bank, although the banker performs many other serv- 
ices to the community. 

The first two functions above mentioned need not 
detain us. They are familiar to every one. Few peo- 
ple now keep much cash on hand, and most people, in 
addition to putting their money into a bank for safe 
keeping, also entrust the bankers with the custody of 
other valuable property, such as jewels and plate. 

The third function of a bank, however, although most 
important, is least understood. The business of the 
banker, in common language, is to lend money. The 
process of lending is simple. A man wishes to borrow 
$1,000 for use in his business. He makes out his note 
at three months for that amount, endorsed, that is guar- 
anteed, by some other responsible person known to the 
banker, and he takes this to the bank to be discounted. 
If the rate of interest is 6 per cent, the bank will buy 
this note from him for $985, deducting 6 per cent 
interest for three months from the face of the note. 
The note is now the property of the banker, and he 
has given in exchange for it, to the lender, the right 
to call upon him at any time for $985. This operation 
is called lending money; in reality it is the purchase 



CREDIT 135 

by the bank of a promise to pay money. The borrower 
may now do one of two things; he may either write 
out a check for $985, payable to himself, step to the 
paying-teller's window and draw out the money, or 
he may leave the money on deposit. As a depositor, 
he becomes the creditor of the bank. The bank is 
liable to him for the payment of $985 on demand. On 
the other hand, the bank is his creditor for $1,000. He 
is liable to the bank, three months from the date of the 
loan, for the payment of that amount. 

In all probability our borrower will take the second 
course. He will not draw out the money, but will take 
a check-book instead. By means of checks, which are 
orders upon the bank signed by himself to pay to cer- 
tain other persons or to himself the amount of money 
named in the orders, the borrower can at any time draw 
out such part of his balance as he needs, and can also 
make payments to others by transferring to them his 
right to receive money on demand from the bank. 
These checks are readily accepted in satisfaction for 
claims by those who do business with him, provided 
they know that he is responsible and would not draw 
checks for a larger amount than his bank balance. 

The creditors of the borrower are not obliged to re- 
ceive his checks in payment. Checks are not legal 
tender. If his creditors insisted upon it, he would be 
obliged to go to the bank, draw out the money and 
make his payments in that form. As a matter of com- 
mon convenience, however, checks are universally ac- 
cepted by business men in payment for every descrip- 
tion of claim. 

102. Checks as a medium of eoc change. — These checks, 
as remarked above, constitute the principal medium of 
exchange in the United States. Nearly all buying and 



136 ECONOMICS 

selling is done in this way. All large transactions are 
accomplished by the use of checks. The largest check 
ever drawn was that drawn by the Secretary of the 
Treasury for $40,000,000 in favor of the stockholders 
in the Panama Canal Company to pay for their prop- 
erty and rights that they had transferred to the United 
States. During 1912, the exchanges of checks reported 
as passing through bank clearing houses in the United 
States was $174,926,921,000. They are the almost uni- 
versal medium of exchange. 

The result of this general use of credit instruments 
in making payments is that the bank is able to sell a 
much larger amount of promises to pay money in the 
form of bank deposits than the amount of money which, 
at any given time, it has on hand to redeem its promises. 
This may be best understood from a concrete example. 

Mr. John Smith is a miller in Minneapolis. He has 
bought at 70 cents a bushel 100,000 bushels of grain 
from William Brown, a grain dealer of Fargo. Mr. 
John Smith has a bank deposit in the First National 
Bank of Minneapolis of $100,000, that is to say, the 
First National Bank has given to him the right to 
draw against it at any time for that amount. He 
owes $70,000 in payment for his wheat, and he sends 
a check for this amount to Mr. Brown at Fargo. Mr. 
Brown is now entitled to have $70,000 of the deposit of 
the $100,000 standing to the credit of Mr. Smith on 
the books of the First National Bank of Minneapolis, 
transferred to his own credit. If he should go to 
Minneapolis, present this check to the paying-teller of 
the First National Bank and be properly identified, the 
teller would pay to him $70,000 in currency which he 
could carry away with him or otherwise dispose of. 



CREDIT 137 

Business, however, is not transacted in this way. If 
Mr. Brown had an account in the Minneapolis bank 
he would deposit the check to his credit. He has, how- 
ever, no account in this bank, and he therefore deposits 
the Minneapolis check with his own bank, the Fargo 
National Bank, for collection. The Fargo bank gives 
him credit on its books for $70,000, which entitles him 
to receive that amount on demand, in return for an 
order drawn by Mr. John Smith of Minneapolis in 
favor of Mr. William Brown of Fargo and endorsed, 
that is, signed over to the Fargo National Bank by the 
latter. The Fargo Bank now sends this check to its 
correspondent in Minneapolis to collect from the First 
National Bank. 

103. The clearing house. — While these transactions 
are going forward, Fargo merchants who deal exten- 
sively with Minneapolis, have bought coal and other 
supplies from Minneapolis, and they have paid their 
Minneapolis correspondents by checks on the Fargo 
National Bank. The Minneapolis dealers, we will sup- 
pose, are all depositors with the First National Bank 
of that city. They deposit these checks, which may 
aggregate $80,000 in amount, with the First National 
Bank. These checks are now cleared, that is to say, 
offset against each other through the Minneapolis 
Clearing House. At ten o'clock every morning all the 
banks of Minneapohs send to this institution, which 
they maintain for the purpose, all the checks, drafts 
and bills of exchange drawn upon other banks which 
have come into their hands during the last twenty-four 
hours. Suppose there are twenty banks in the Clear- 
ing House. Each one of these banks will have claims 
against every other bank, either on account of checks 



138 ECONOMICS 

deposited with it against these other banks, or against 
banks for which these other banks act as correspondentSo 
These claims are now offset against each other. 

We can understand this best by continuing our illus- 
tration: The First National Bank of Minneapolis 
takes to the Clearing House $500,000 in checks against 
other Minneapolis banks. Among these checks are 
those for $80,000 sent from Fargo and deposited with 
the First National. Every other bank in Minneapolis 
brings to the Clearing House checks and other claims 
against the First National Bank for $490,000. Among 
these claims, is the check for $70,000 drawn by John 
Smith in favor of William Brown, of Fargo, South 
Dakota, deposited by William Brown in the Fargo 
National Bank and sent by the Fargo National Bank 
to its Minneapolis correspondent. Here then is the 
situation: The First National Bank owes to all the 
other banks of Minneapolis $490,000; the other banks 
owe the First National $500,000. These claims will 
be liquidated or cleared, as between the First Na- 
tional and the other members of the Clearing House, 
by the paying of $10,000 by the other banks to the 
First National. The same may be said of every other 
member of the Clearing House. Every bank reports 
claims against every other member. A comparison of 
the debits with the credit of each bank shows either 
that every member of the Clearing House owes some- 
thing to the other members, or is owed something by 
them. All these claims can be cleared or liquidated, 
therefore, in case the debtor banks, that is to say those 
banks whose claims against other banks are less than the 
sum of other banks against them, pay to the Clearing 
House the amoimt of these differences, and on the 
other hand, if the creditor banks receive this amount in 



CREDIT 1S9 

due proportions from the Clearing House. The First 
National was creditor on the day in question to the ex- 
tent of $10,000. At the close of the day, therefore, 
it received $10,000 from the Clearing House. 

104. The deposit currency is a check currency. — The 
most important result of this operation has been already 
suggested. Because the checks which are drawn 
against the First National of Minneapolis by its de- 
positors are constantly being oiFset through the Clear- 
ing House by checks upon other banks deposited with 
it for collection, the First National Bank is able to 
issue promises to pay money in the form of deposits 
whose aggregate amount is several times greater than the 
amount of cash which it has on hand. On September 6, 
1904, this bank reported $5,271,073 of deposits and 
$981,856 of cash. Its liabilities to pay money on de- 
mand, it will be seen, were over five times as great as the 
amount of money it had to meet these obligations. This 
is made possible by the constant stream of claims upon 
other banks which is flowing into the First National 
Bank for collection, and also by the constant stream 
of payments on account of its loans. As a result of 
this offsetting of claims against each other, the First 
National Bank of Minneapolis is able to issue and to 
keep in circulation by means of checks drawn by its 
depositors, an amount of promises to pay several times 
the sum of money which it has on hand. These prom- 
ises to pay circulate throughout the West and may even 
travel to New York, Boston or San Francisco, every- 
where paying debts, buying commodities and perform- 
ing the work of money. These bank deposits therefore 
are, properly speaking, to be included among the funds 
of the community. They constitute a part and the most 
important part of the medium of exchange. They are 



140 ECONOMICS 

not money; they are merely promises to pay money, 
but owing to the development of banking methods, 
these credit instruments perform all the work which 
money would otherwise be called upon to do. We may 
call these funds, therefore, credit funds as distinguished 
from the money funds already described. 

105. Limitations of bank credit. — The issue by banks 
of promises to pay money is limited by its cash reserve. 
Both experience and law require that the bank should 
keep a certain proportion of its deposits in cash with 
which it may redeem its obligations, because if they 
are not met when presented the bank must close its 
doors. This percentage varies from 10 to 25 per cent 
in the United States, and in this way the issue of prom- 
ises to pay money is limited by the amount of money 
which the bank keejis in its vaults, which in turn is 
limited by the requirements of the community for cash 
with which to carry on retail transactions, such cash be- 
ing withdrawn from bank reserves. 

106. Extent to which "promises to pay" are used. — 
We see now that the work of exchange in the United 
States is performed almost entirely by promises to pay 
gold, either directl}^ or indirectl}'-. The government 
issues promises to pay gold in the form of paper money ; 
the banks issue these promises in the form of bank notes, 
and these notes are practically guaranteed by the gov- 
ernment. These promises to pay gold are taken as 
equivalent to gold because the government stands ready 
to redeem them in gold at any time. A much larger 
part of the work of exchange, over 90 per cent of 
the whole number of exchanges, is performed by the 
use of credit instruments — promises to pay money on 
demand wliicli are sold by tlie bank to its borrowers 
and depositors. These promises are accepted at par 



CREDIT 141 

with actual money because their makers are known to 
be responsible and because at any time a check can be 
turned into money at the bank. 

107. Basis of bank credit. — The confidence in the 
bank's ability and willingness to redeem its promises 
to pay, according to the terms of the promise, is based 
upon three things : ( 1 ) Upon the reputation and bus- 
iness standing of its directors and officers; (2) upon 
the money reserve of the bank — an amount of cash held 
in its vaults, usually from 10 to 25 per cent of its obli- 
gations outstanding against it — an amount which is 
deemed sufficient to meet any actual demand fgr cash 
which may arise; (3) upon the bills receivable of the 
bank, mainly consisting of the promises to pay money, 
sold to it at different times by its customers and coming 
due in an uninterrupted series. 

We see then that the basis of bank credit is almost 
identical with the basis of government credit. The 
reasons why the bank's promises to pay are taken at 
par with gold, are generally identical with the reasons 
which influence exchangers to accept paper money at 
par with gold. In each case there is a general confi- 
dence in the willingness of the government or of the 
bank to redeem its promises, and as a specific and con- 
vincing evidence of the ability to redeem, there is (1) 
a store of actual cash and (2) evidence of the ability 
to get cash, if this store should be exhausted. 

We now understand the composition of the medium 
of exchange in the United States. It is, all of it, based 
upon gold as a foundation. Besides gold, there are 
promises to pay gold issued by the government and 
promises to pay money issued by the bank. This me- 
dium of exchange can also be divided into money funds 
— gold and promises to pay gold — and credit funds — 
promises to pay money. 



CHAPTER IV 

BANKING SYSTEMS 

108. The organization of natio7ial banks in the United 
States. — The National Banking Law of the United 
States dates from February 25, 1863. Most of the 
large banks are now organized under this law. On 
September 4, 1912, there were 7,397 national banks with 
$1,046,012,580 of capital, $6,061,009,345 of loans, and 
$5,891,670,007 of deposits. The organization of the 
system is as follows: 

There is a bureau in the Treasury Department which 
has charge of the national banks. At its head is a 
special officer known as the Comptroller of the Cur- 
rency. Any number of persons, not less than five, may 
form an association for banking purposes, to continue 
for twenty years. To this association, the Comptroller 
of the Currency, in his discretion, grants a certificate 
authorizing them to begin the business of banking under 
the National Banking Act. Every national bank 
located in towns of 3,000 inhabitants or less is required 
to have a capital of $25,000; in towns from 3,000 to 
6,000, $50,000 of capital is required; from 6,000 to 
50,000 inhabitants $100,000 capital; and in cities of over 
50,000, $200,000 capital is required for every bank. 
Fifty per cent of the subscribed capital must be paid in 
in cash before the bank can begin business, and the re- 
mainder must be paid in monthly installments of not 
less than 10 per cent each. 

109. Powers of 7iational hanks. — The powers of 

142 



BANKING SYSTEMS 143 

national banks are as follows: They may discount 
promissory notes, drafts, bills of exchange and other 
evidences of debt; they may receive deposits, buy and 
sell bills of exchange, coin and bullion, loan money on 
personal security and issue circulating notes. They are 
not allowed to hold real estate outside of their banking 
property, except when they acquire this as security for 
bad debts, in which case they must sell the real estate 
within five years. The reason for this provision is that 
real estate is not quickly convertible into money, and a 
bank should have all its assets in a readily convertible 
form, since its liabilities are payable in cash on demand. 
Every bank before beginning business must deposit 
with the United States Treasury a certain amount of 
United States bonds. Banks with a capital of $200,000 
or less must deposit bonds equal to at least one- fourth 
of their capital. Those whose capital exceeds $200,000 
must deposit at least $50,000, but need not deposit more. 
Each bank, after depositing these bonds, is entitled 
to receive from the Comptroller an amount of circu- 
lating notes equal to the par value of the bonds de- 
posited. The amount of bonds which any bank is 
allowed to deposit must not exceed its paid-in capital 
stock. These bank notes are receivable at par for all 
dues to the United States, except duties on imports, and 
are payable for all debts owed by the United States, 
except interest on the public debt. Every bank must 
receive the notes of every other bank at par, and each 
bank must redeem its circulating notes on demand at 
its own counter. It must also keep on deposit with the 
United States Treasurer an amount of lawful money 
equal to 5 per cent of its circulation to be held for the 
redemption of its notes. The national banks have a 
monopoly of the privilege of note issue. In order to 



144. ECONOMICS 

encourage the formation of national banks after the act 
Mas passed, a tax of 10 per cent was levied upon all 
other bank notes, thus compelling most of the state banks 
to take out national charters and to buy government 
bonds. The sale of bonds was the original object of 
the act. In case of default by any bank in the redemp- 
tion of its notes, the Comptroller may sell the bonds 
deposited and redeem the notes out of the proceeds. 
The note issues of the national banks are much less im- 
portant than their deposits, and for the protection of the 
depositor the National Banking Law provides certain 
reserve requirements. 

110. National hank reserves. — Every bank in certain 
large cities, designated as reserve cities, must keep a 
reserve of lawful money equal to 25 per cent 
of its deposits. One-half of this reserve may be de- 
posited with national banks in New York, Chicago, or 
St. Louis, which are known as the "central reserve cities" 
and still be counted as a part of the legal reserve. All 
other banks must keep a reserve of 15 per cent of 
their deposits, three-fifths of which may be deposited 
with the reserve or central reserve city banks. If a 
bank increases its deposits so that its reserve falls below 
the requirement, the Comptroller may notify the bank 
that it is violating the law, and if it fails to bring up 
this reserve, it may be put into liquidation. No national 
bank may lend more than one-tenth of its capital and 
imimpaired sin'plus to any one person, corporation or 
firm. Tliis does not apply to the discounting of com- 
mercial paper or bills of exchange. 

The business of the bank is managed by a board of 
not less than five directors, each of whom must own 
at least ten shares of the capital stock. The stock- 
holders of a national bank are held individually liable 



BANKING SYSTEMS 145 

for the debts of the bank to an amount equal to the par 
value of their shares. This is what is known as the 
double liability of national bank stockholders. 

111. Bank of England. — The Bank of England is the 
most important bank in the world because it furnishes 
the circulating medium of Great Britain and because 
it acts as the fiscal agent of the British government. 
This bank is a private corporation which is given certain 
privileges by law, and which is held to certain require- 
ments. In its deposit functions the Bank of England 
is subject to no restrictions, but its issue of «notes must 
be made according to a law passed in 1844. 

The Bank of England is allowed to issue notes against 
securities held in its vaults to the amount of $88,875,000. 
Any additional notes which are issued must be secured 
by a deposit of gold coin or bullion to an equal amount. 
The Bank of England maintains a very large reserve 
against its deposits on account of the fact that the joint 
stock banks and private banks which do most of the 
banking business in the United Kingdom deposit nearly 
all of their cash with the Bank of England. The entire 
credit structure of England rests therefore upon the 
reserve of coin and bullion which is kept in the Bank of 
England and which seldom falls below 45 per cent, 
frequently rising to 55 and 60 per cent. 

112. Bank of France. — The Bank of France also 
acts as the fiscal agent of the French government, and 
has a monopoly of note issue in France. It is authorized 
by law to issue 5,000,000,000 francs, equivalent to 
$1,000,000,000, of notes. This is a private bank, the 
government having no control over it, and its reserve is 
not stipulated by law. In practice the reserve which the 
Bank of France keeps against its circulating notes is 
almost equal to the amount of notes outstanding. The 

I— 10 



146 ECONOMICS 

deposit and check system is little used in France, most 
of the business of that country being transacted with 
bank notes. These notes, owing to the large reserve 
which the bank keeps, are as well secured as those of the 
Bank of England or of the national banks of the 
United States. 

113. Imperial Bank of Germany. — The Imperial 
Bank of Germany was established in 1875. This is a 
government institution. The president and directors 
are appointed by the German Emperor for life, and 
the officers of the bank are considered government 
officials. The shareholders have some control over the 
management through a committee which they appoint. 
At the time the bank act was passed, there were thirty- 
two independent banks in the German Empire, having 
the right of note issue. This right they retain and are 
allowed to issue 135,000,000 marks ($33,750,000) in 
notes, against which no cash reserve is kept, while the 
Reichsbank, or Imperial Bank, is allowed to issue 
250,000,000 marks ($62,500,000) of uncovered notes. 
When any private bank ceases to issue notes, its rights 
of note issue pass to the Reichsbank. The uncovered 
issues of the Reichsbank have since its establishment 
been increased by law to 450,000,000 marks ($112,- 
500,000). For any notes above this amount the bank 
must hold an equal amount of cash in its reserve, but 
it may exceed this limitation of cash reserve by paying 
to the Imperial Treasury a tax of 5 per cent on the 
surplus issue. 

114. Protection of hank note issues. — It will be ob- 
served from the foregoing that the right of issuing 
bank notes in these four countries which have been 
examined is very strictly limited by law. It is felt that 
bank notes which serve as money and which are received 



BANKING SYSTEMS 14T 

as money by everyone, should have special safeguards 
and protections thrown about them to insure their 
immediate convertibility. This is accomplished in the 
United States by the bond deposit and by the redemp- 
tion fund; in England, by the reserve of securities 
against uncovered notes; in France by the custom of 
keeping a reserve of cash equivalent to the amount 
of notes outstanding, and in Germany by a reserve of 
securities with cash deposits for any notes in excess of 
a sum fixed by law. 

115. Asset currency. — It has been recently proposed 
in the United States that the national banks should be 
allowed to issue notes on the security of their assets, on 
the ground that the national bank currency does not 
increase and decrease according to the demands of trade. 
These asset bank notes, if they should be authorized, 
would increase and diminish in exactly the same manner 
as the bank deposits do at present, and they would 
serve a useful purpose in supplying special demands for 
cash especially in the West and South at certain seasons 
of the year. These western and southern banks during 
eight months of the year, under the provisions of the 
National Banking Law, deposit a large amount of their 
cash in the eastern cities. This money goes into the 
reserves of the eastern banks and is made the basis 
of deposit credits. In the late summer and fall, cash is 
needed in the West and South to move the crops and pay 
the farm hands. These western and southern banks 
at this time call back the cash which they have in 
eastern cities, reducing the reserves of these eastern 
banks, forcing them to call loans in order to reduce their 
deposits to the legal requirement, and this return move- 
ment of cash frequently results in severe stringency in 
the money market. It is argued that if the national 



148 ECONOMICS 

bunks were allowed to issue notes against their deposits, 
this withdrawal of money from the East could be 
avoided. On the other hand, asset bank currency is 
severely criticised on the ground that the security of 
these notes would be inadequate and that the money of 
the people cannot be too thoroughly protected. 

Asset bank notes, moreover, it has been pointed out by 
Professor Joseph French Johnson ^ and other writers on 
finance, would not furnish an elastic currency because of 
the existence in circulation at present of a large amount 
of token paper money suitable for use in bank reserves. 
National banks are not allowed to include national bank 
notes in their reserve. The effect of issuing more bank 
notes under some asset currency plan, would be, there- 
fore, that the banks would substitute the new notes by 
paying them out over their counters, for an equal amount 
of legal tender money, which they were formerly obliged 
to pay out into the circulation but which they could now 
place in their reserves, enlarging in this way the basis 
of their loan credit. Under these circumstances, the 
currency would not be elastic, since it would be profitable 
for the banks to maintain them in circulation, and the 
only substantial change from the present system would 
be a considerable expansion of bank deposits and loans 
on the strength of these larger reserves. 

'See "Money and Currency," by J. F. Johnson, Chapter XV; "Schemes for 
Currency Reform," by J. F. Johnson, Jowrna^ of Accouniaiicy, January, 1908; also 
Volume V of Modern Business. 



CHAPTER V 

PRICES 

116. How value is determined. — ^What is value? We 
have already defined this term in a general way in dis- 
cussing wealth. A thing is economically valuable which 
has utility or desirability, and which is so limited in 
quantity that it can be appropriated as private property. 
The value of any commodity is measured by the quantity 
of other goods which will be given to obtain it. For 
this reason, the value of any commodity must be ex- 
pressed in terms of some other commodity ; thus a bushel 
of wheat is worth 142 pounds of pig iron or 23.2 grains 
of gold. Every commodity may, in this way, be related 
to every other commodity in terms of value. 

That a thing may have any value in exchange, two conditions 
are necessary. It must be of some use ; that is ( as already ex- 
plained) it must conduce to some purpose, satisfy some desire. 
No one will pay a price, or part with anything which serves 
some of his purposes, to obtain a thing which serves none of 
them. But, secondly, the thing must not only have some 
utility, there must also be some difficulty in its attainment, 
"any article whatever," says Mr. DeQuincey,^ "to obtain 
that artificial sort of value which is meant by exchange value, 
must begin by offering itself as a means to some desirable pur- 
pose; and secondly, even though possessing incontestably this 
preliminary advantage, it will never ascend to an exchange value 
in cases where it can be obtained gratuitously and without effort ; 
of which last terms both are necessary as limitations. For often 

1" Logic of Political Economy," p. 13. 

149 



150 ECONOMICS 

it will happen that some desirable object may be obtained gra- 
tuitouslj' ; stoop, and you gather it at your feet ; but still, be- 
cause the continued iteration of this stooping exacts a laborious 
effort, very soon it is found, that to gather for yourself vir- 
tually is not gratuitous. In the vast forests of the Canadas, at 
intervals, wild strawberries may be gratuitously gathered by 
shiploads ; yet such is the exhaustion of a stooping posture, and 
of a labor so monotonous, that ever^'body is soon glad to re- 
sign the service into mercenary hands." ^ 

Upon what now does the value of any commodity 
depend? Upon what is known as its marginal or final 
utility — that is to say, the estimate of the intending 
purchaser as to the desirability of the last bushel of 
wheat, the last pound of cotton or the last j^ard of cloth 
which is offered to him. It is a well-known fact, of 
which any one can satisfy himself by observation, that 
the satisfaction derived from the use of any commodity 
diminishes as the quantity of that commodity to be used 
or consumed is increased. An amusing illustration of 
this is furnished by the attempts of the summer boarder 
to satisfy his appetite for peaches or grapes; he very 
soon discovers that the satisfaction derived from the 
consumption of fruit diminishes rapidly as the amount 
eaten increases. 

In the field of exchange, since each apple or each yard 
of cloth of a given quality or grade is identical with 
every other apple or yard — no greater importance 
will be placed upon the last unit of the commodity than 
upon the first. In other words, the utility or de- 
sirability of every bushel or pound or yard of a com- 
modity will be the utility or desirability of the last or 
final unit offered for sale. As the utility of an 
increasing supply of a commodity declines, the sacrifice 

ij. S. Mill, "Principles of Political Economy," Book III, Cliajiter 11. 



PRICES 151 

which will be made by some other than its owner to 
obtain possession of it, expressed in terms of the com- 
modities which the intending purchaser has to oiFer, 
declines also ; in other words, the demand weakens. As 
a result let us say, of the increasing supply of, and the 
decreasing demand for, wheat as compared with cloth, 
the value of wheat, in terms of cloth, declines and con- 
versely the value of cloth in terms of wheat rises. 

We thus arrive at an explanation of the well-known 
law of political economy, that value depends upon the 
interaction of supply and demand ; in common language, 
value depends upon supply and demand. So much for 
the theoretical aspect of the value question. 

In effect, the importance of any unit of a commodity is 
determined by the want-satisfying power of the marginal unit. 
The importance of a unit, thus determined, is termed its effective 
utility. 

But does any man really arrange his wheat or other goods 
in series of units and say to himself: "This unit is worth one 
thousand x ; without it I should starve ; this unit is worth one 
hundred x, as my comfort and strength depend upon it ; this 
unit is worth five x, for if I did not have it I should be com- 
pelled to do without my pets" ? Not at all ; the different units 
are just alike, and one is thought of as just as desirable as 
another. For practical purposes, the utility of one unit is the 
same as that of another. Let us suppose that there are four 
units of wheat, and that the last has a utility of five x. What 
is lost if any one of the four units is lost? Simply five x. 
What sacrifice would one make to prevent the loss of any unit, 
even the one which would have been used to sustain life, and by 
itself would be worth one thousand x? A sacrifice not greater 
than five x. For if any other unit is lost, the least important 
one will be substituted for it, and the effective loss will be prop- 
erly placed at five x. 

The utility of the last and least important unit, then, exer- 



152 ECONOMICS 

clscs an important influence in detemiining what utility one will 
in effect ascribe to any unit. For practical purposes the utility 
of any unit is exactly equal to that of the least important one. 
The utility of a unit, thus measured by that of the least im- 
portant one, is called "effective utility." 

If the total number of units of a good is so great that the 
last one has no utility, the good has no effective utility at all. 
No one will do anything to prevent the destruction of part of 
his supply ; no one will give anything to increase his supply. 
Thus water, although a single gallon would have indefinitely 
great utility if this were the only gallon available, is in most 
places so abundant that the last units of the supply have no 
utility. Therefore no unit has effective utility.^ 

117. Value of commodities expressed only in money. 
— In our discussion of money we found that everything 
was exchanged for the medium of exchange, and con- 
versely, that the medium of exchange was exchanged for 
every commodity that is produced. The division of 
labor, through which the modern miracles of production 
have been accomplished, was only made possible because 
every productive agent and every locality was, through 
the institution of exchange, left free to be devoted to 
some highly specialized employment. The result of 
this institution of money exchange is that commodities 
are never in actual practice expressed in terms of each 
other, but in terms of money. When a farmer takes 
his wheat to market he is not thinking of the value of 
that wheat in terms of lumber, coal or groceries. He 
may have use at that time for none of these things; he 
is thinking of its value in terms of money. He is not 
interested in how much cotton cloth he can get for his 
wheat, but in the quantity of money he is to receive. 

The concern of every producer is not with com- 

1 Alvin S. Johnson, " Introduction to Economics," Cliapter II, pp. 27-28. 



PRICES 153 

modities either in general or in particular, but with 
money. The laboring man does not habitually think of 
his wages as so much bread, meat and clotting, but 
as so much money. Only when the individual comes to 
part with his money in the store or the market, does the 
ultimate importance of commodities in exchange arise. 
In reality, every producer is striving for the necessities, 
comforts and luxuries of existence. In appearance 
and in present fact, however, his sole concern is with 
money. It is, therefore, with money as an end rather 
than as a means to an end that we have now to concern 
ourselves.^ 

1 Money, when its use has grown habitual, is the medium through which 
the incomes of the different members of the community are distributed 
to them, and the measure by which they estimate their possessions. As 
it is always by means of money that people provide for their different 
necessities, there grows up in their minds a powerful association leading 
them to regard money as wealth in a more peculiar sense than any other 
article; and even those who pass their lives in the production of the most 
useful objects, acquire the habit of regarding those objects as chiefly 
important in their capacity of being exchanged for money. A person who 
parts with money to obtain commodities, unless he intends to sell them, 
appears to the imagination to be making a worse bargain than a person 
who parts with commodities to get money; the one seems to be spending 
his means, the other adding to them. Illusions which, though now in 
some measure dispelled, were long powerful enough to overmaster the 
mind of every politician, both speculative and practical, in Europe. 

It is evident now, however, that the mere introduction of a mode of 
exchanging things for one another, by first exchanging a thing for money, 
and then exchanging the money for something else, makes no difference in 
the essential character of transactions. It is not with money that things 
are really purchased. Nobody's income (except that of the gold or silver 
miner) is derived from the precious metals. The pounds or shillings 
which a person receives weekly or yearly, are not what constitutes his 
income; they are a sort of ticket or orders which he can present for pay- 
ment at any shop he pleases, and which entitle him to receive a certain 
value of any commodity that he makes choice of. The farmer pays his 
laborers and his landlord in these tickets, as the most convenient plan 
for himself and them; but their real income is their share of corn, cattle 
and hay, and it makes no essential difference whether he distributes it 
to them directly or sells it for them and gives them the price; but as 
they would have to sell it for money if he did not, and as he is a seller 



164. ECONOMICS 

118. Prices and profits. — AVe shall now discuss prices 
as expressing the value relation between com- 
modities at any particular time. It really makes no 
difF-erence whether prices are high or low if all prices 
(including labor) are high or low at the same 
time. It is the time relation which is of interest. What 
will prices be next week, next month, or next year? 
This is the important question. 

In changes of price are found the profits or losses of 
industry. The incentive to economic activity is the de- 
sire for profit. Under present conditions, however, man 
works because he sees something ahead for himself and 
personal profit is the mainspring of effort. Profits con- 
sist in the margin between cost and selling price. Costs 
are made up of the price paid for raw materials, wages, 
fixed rentals, depreciation of plant, bad debts and other 
losses that would have to be written off. Each one of 
these items moves much more slowly up or down than the 
price of the product. Fixed charges, such as interest, 
do not move at all; wages move very slowly. The 
element of depreciation is fixed. We have one rate for 
brick buildings, another for frame buildings and another 

at any rate, it best suits the purposes of all, that he should sell their 
share along with his own, and leave the laborers more leisure for work 
and the landlord for being idle. The capitalists, except those who are 
producers of the precious metals, derive no part of their income from 
those metals, since they only get them by buying them with their own 
produce; while all other persons have their incomes paid to them by the 
cai)italists, or by those who have received payment from the capitalists, 
and as the capitalists have nothing from the first except their produce, 
it is that and nothing else which supplies all the incomes furnished by 
them. There cannot, in short, be intrinsically a more insignificant thing, 
in the economy of society, than money; except in the character of a con- 
trivance for sparing time and labor. It is a machine for doing quickly 
and commodiously, what would be done, though lesS quickly and com- 
modiously, without it; and like many other kinds of machinery, it only 
exerts a distinct and independent influence of its own when it gets out of 
order.— J. S. Mill, "Political Economy." 



PRICES 155 

for machinery, etc., but they do not change. Selhng 
and administration expenses do not greatly change. 
The only thing that does change to any extent is the 
price of materials. Of all these items of expense, the 
last named is the only one that you can modify at the 
same rate as the price of the product. The result is that 
expenses move up or down very much more slowly than 
the selling price of the product. Since expenses change 
much more slowly than the price of the product, a rise 
in the price of anything means an increase in the profits 
of the man who produces that product, and on the other 
hand, a fall in prices almost always means a decrease 
in profits. It is unusual that any one's expenses should 
increase as rapidly as the price of his products. It is 
even more unusual that a man should decrease his cost 
of production as rapidly as the price of his product de- 
clines. 

From these facts we arrive at the conclusion that rising 
prices mean profits to everybody interested, and that 
falling prices mean falling profits. Since large profits 
are the object of every business man's endeavors, the 
question of price is the most important fact of the busi- 
ness world. The man who knows the laws influencing 
prices in his business is assured of success. 

Professor Johnson, in his "Money and Currency," 
summarizes the importance of prices very clearly, as 
follows : 

The level of prices, it should be noticed, is itself of no im- 
portance ; it does not matter whether prices are high or 
low, if there is perfect adjustment between prices and the 
supply of money. Whether the value of the dollar shall 
be much or little, whether prices, in other words, shall 
be high or low, is of no more consequence than the ques- 
tion of whether the mile shall contain ten thousand or five thou- 



156 ECONOMICS 

sand yards. But changes in the value of a dollar, that is 
changes in the level of prices, are of the utmost importance, 
for they are always attended by an irregular re-adjustment of 
prices. The question of high and low prices is entirely dif- 
ferent from the question of rising and falling prices. 

When prices are rising with more or less steadiness the 
monetary standard is called a "depreciating" standard; when 
they are falling the standard is said to be "appreciating," 
growing more valuable. Economists have generally held that 
the effects of a depreciating standard, if the rise of prices is not 
too pronounced, are less harmful than the effects of an appre- 
ciating standard. We have already in the preceding chapter 
had occasion to call attention to the remarkable stimulus to in- 
dustry which follows from a steady and continuous rise of 
prices, and to the depressing effect of falling prices. 

The disturbing effects of a change in the value of the stand- 
ard are due to four circumstances, — (1) the use of credit; (2) 
the fact that production involves a period of time; (3) the fact 
that prices do not change uniformly, and (4) the psychology of 
confidence and depression. 

It is evident that if men did not borrow or lend, a change in 
the level of prices would be less hurtful than it is. In our dis- 
cussion of the commodity rate of interest it is shown that a 
change in the price level had a curious effect upon relations be- 
tween borrower and lender; if the level of prices is rising, the 
lender receives back in real value much less than he loaned ; 
wliile if the level of prices is falling, the borrower is obliged to 
return in real value more than he received. If prices are fall- 
ing, the borrower, in order to repay the principal, is obliged to 
sell more goods than he was able to buy with the money when 
he borrowed it. 

A farmer who borrows money when wheat is one dollar a 
bushel is very nmch discouraged as the price of the wheat falls, 
for his ability to pay his debt is steadily diminishing. He is 
injured as nnich as if he had borrowed one thousand bushels of 
wheat and were required to repay the loan in bushels of larger 
ca])a(ih-. "^riie farmer's case is no different from that of the 



PRICES 167 

man who borrows money or credit and engages in manufactur- 
ing. A certain time must elapse before he can turn the capital 
over and go into the market with his finished product. If in 
the meantime a change in the price level has occurred and the 
price of his product has been lowered, he will take in less money 
than he expected, his money profits will be small, and his ability 
to pay his debt will be impaired. 

It is incorrect to argue that this entrepreneur and farmer are 
both just as well off with less money because the value of money 
has increased. They are not as well off. If prices fell uni- 
formly it would be evident to everybody that the purchasing 
power of a dollar had increased and that the fall of prices was 
due not to overproduction in this or that industry but to a 
change in the value of money, and men might learn to minimize 
the evil effects of such a change. But the fall is not uniform 
and is never ascribed by business men to changes in the value 
of money. Indeed, it is impossible to determine in any given 
case whether a fall of price is due to a fall of value in a par- 
ticular good or to a rise in the value of money. The problem 
is so intricate and so many influences are involved that a com- 
plete analysis of the causes in any particular instance cannot 
easily be made. 

Furthermore a fall of prices, since it strikes first this com- 
modity and then that, always catches the entrepreneur unpre- 
pared. Inasmuch as the wholesale prices are the first affected, 
he finds that his cost of living is the same as before ; the prices 
of some of his raw materials have declined, but others have not 
felt the change ; his laboring men insist upon the old rate of 
wages. He is obliged to sell at a lower rate of prices than his 
money costs of production were based upon. It will not cheer 
him to tell him that money has increased in value and that the 
money he is getting for his goods will on the average buy more 
than the money he paid out. All his debts are money debts. 
A definite sum of money is what he needs in order to keep on 
his feet. The thing he is interested in is prices, not values, and 
the inexplicable turn which prices have taken threaten him with 
ruin. 



158 ECONOMICS 

The psychological effects of a change in the price level are 
of the utmost importance. Very few men who engage in busi- 
ness or industry know with certainty what their profits are going 
to be. The production of wealth is always attended with risk. 
Men assume this risk, sometimes boldly, sometimes timidly. If 
times are considered good and the prices of conspicuous articles 
are rising, there is a general feeling of confidence that business 
ventures can safely be undertaken, and men engage freely in 
production. As a result of this confidence there is a larger 
production of wealth and the average purchasing power of every 
member of the community is increased. The industrial mil- 
lenium would be reached if only this production could always be 
wisely directed; that is to say, if men could always gauge the 
wants of their customers, if producers could foresee changes in 
the popular tastes and vary their productions accordingly, for 
then the condition commonly described as overproduction would 
never ensue. The ability of people to buy would grow as tiie 
supply of goods increased. Unfortunately, however, it is im- 
possible to gauge changes in the demand for goods, and indus- 
trial mistakes will doubtless continue to be made and to bring 
about the recurring periods of prosperity and hard times. But 
of the effect which the mental condition, the hopefulness, of 
a people has upon their productivity there can be no doubt. 
The business man is always discouraged by any loss which he 
cannot understand or explain, and his discouragement is com- 
municated like a contagious disease to others. Likewise he is 
greatly stimulated by unexpected profits, and his new confidence 
is also contagious, stimulating his neighbors to enterprise. 

Here we find perhaps the worse effects of a gradual fall of 
prices. Men do not and probably never will thoroughly under- 
stand the relation between money and goods. To them money 
is a thing of fixed and changeless value; goods are what they 
make and sell, and changes in prices are always attributed to 
changes in the demand for or supply of goods. As a result, 
when a rising demand for money is not met by an increased sup- 
ply, and the prices of commodities here and there begin to 
weaken business men are unable to explain the phenomenon and 



PRICES 159 

are puzzled and distressed. The practical man usually attributes 
such a fall in prices to excessive competition and overproduc- 
tion. During the last twenty-five years of the nineteenth cen- 
tury these two phrases were in everybody's mouth in explana- 
tion of the heavy prices and vanishing profits of that period; 
and many a young man was advised to keep out of business and 
enter one of the professions on the ground that business was 
"overdone." 

119. The making of prices. — Upon what do prices 
depend? By this we have to understand particular 
prices, not general or average prices. We are con- 
cerned with the prices of flour, wheat, wool, meat and 
eggs. What influences the quantity of money for which 
these commodities in suitable units and denominations 
will be exchanged? To answer this question it is ad- 
visable to see the price-making process as it actually 
goes on in the produce exchange. 

Every newspaper reader is familiar with the Chicago 
Board of Trade. Most people have also heard of the 
New York Cotton Exchange, the Coffee Exchange or 
New York Produce Exchange. Every large city in the 
United States has one or more of these exchanges, which 
are places where buyers and sellers can come together 
and where prices are made. 

The Chicago Board of Trade, for example, is a 
voluntary association whose primary object is to afford 
a place for dealing in grain and other provisions. Its 
members are called brokers. They may buy and sell 
for themselves, but as a rule they buy and sell for others, 
sometimes their employers, sometimes outsiders who em- 
ploy them for particular transactions. The members of 
the board of trade are constantly engaged in buying and 
selling- on the most favorable terms that can be secured. 
In order to do this, they are constantly engaged in fore- 



160 ECONOMICS 

casting the forces causing the prices of wheat, corn, oats, 
pork and other staple food products to rise or fall. 

They must scan the newspapers with constant care 
for the latest news of disturbance or prosperity through- 
out the world. In addition they watch the news ticker 
service which tells them of any important happening 
within a few minutes — sometimes seconds — after its oc- 
currence. Their private advices as to weather, crop 
conditions, and the like, keep flowing in. 

The wheat market of the Chicago Board of Trade on 
JNIonday, JNIarch 24, 1913, was described as follows in 
the New York Commercial: 

While the tone in wheat was generally steady, trade was 
limited, mostly the result of the poor wire service which inter- 
fered with news dispatches and the forwarding of orders. The 
principal factor was the reports of severe wind storms at many 
points in the winter wheat belt, particularly west of the Mis- 
sissippi River. This did not have much influence, however, for 
while snow covering is not heavy the belief was that the crop 
has not advanced far enough to be damaged by wind storms. 
Another important factor was the advance of nearly two cents 
a bushel at Buenos Aires at the opening. This was due to 
unfavorable weather for the movement and an improved foreign 
demand. The cash and export demand here continues limited. 
European markets were generally closed owing to the Easter 
holidays. Weekly statistics, however, were about as expected. 

120. Factors which influence price. — What are the 
factors which here appear to influence the prices of 
grain? We may consider them (1) under the head of 
supply and (2) under the head of demand. In dis- 
cussing supply we should remember that everything 
that is prckluced will be eventually sold, that is to say, it 
is all destined for the market. The factors that tlie 
broker takes into account in estimating the supply of 
wheat are: (1) the visible supply, the amount of 



PRICES 161 

wheat in elevators and in transit between this country 
and Europe and between grain fields and the various 
centers; (2) the stock of wheat in local elevators and in 
farmers' hands; (3) the size of the growing crop. Esti- 
mates are to be had at regular intervals by the Depart- 
ment of Agriculture giving the condition of wheat in 
different parts of the country. From these reports, 
which are generally quite accurate, the experts on the 
board of trade calculate with surprising exactness the 
size of the crop in a given locality. These reports are 
published from time to time, and with them the estimates 
of the prospective yield. (4) Any current news may in- 
fluence the supply which indicates either an increase or 
a diminution in the amount of wheat for sale; for 
example, war news or rumors of a decline in ocean rates, 
due to competition, or an increase or diminution of the 
German tariff on grain, would all have an influence 
upon the estimates of supply. (5) The condition of the 
money market has an important bearing upon the future 
supply. Business in the United States is, as we have 
seen, very largely transacted on borrowed money. Par- 
ticularly is this true with the staple commodities. Aside 
from the great army of speculators who buy grain or 
cotton with a small proportion of their own money, and 
who have a large proportion of the purchase price 
borrowed for them from the banks by brokers who give 
the warehouse receipts for the grain purchased as se- 
curity, there are the large manufacturers and dealers 
who borrow money to hold or "carry" stocks of com- 
modities for current needs or for future requirements. 
If money rates are low, and if loans are readily made 
on proper security, the amount of this buying with 
borrowed money is increased. If, on the other hand, 
the banks are reluctant to loan, and if they feel that 
I— 11 



162 ECONOMICS 

they have sold more promises to pay than it will be 
convenient for them to meet, they may refuse to lend, 
except to a few favored borrowers, and may also refuse 
to extend these loans that the}^ have already made. A 
large amount of bank loans are also made on "call," 
that is to say, the bank reserves the right to demand 
payment at any time. If a condition of the money 
market arises in which banks are refusing to make or 
renew loans, and are calling loans already made, the 
effect is instantly to increase the supply offered upon 
the market of those commodities which are being carried 
with borrowed money. 

A man borrows for two reasons : Either to buy or to 
keep from selling. If borrowing is made difficult or 
if rates of interest are raised, bids to purchase at a 
given price level are diminished and offers to sell are 
increased. A most important element, therefore, of 
the daily calculations of a produce broker is the condi- 
tion of the money market. 

121. Factors influencing demand. — Passing now to 
the forces of influencing demand, we have: (1) An 
increase or decrease in the supply of other grains, such 
as corn, oats or rye, which may be substituted for wheat. 
A decrease in the corn crop means that there will be an 
increased consumption of wheat for some of the pur- 
poses to which corn would otherwise be applied. A 
fluctuation in the yield of the substitutes for wheat has, 
therefore, a most important influence upon the demand 
for that grain. (2) The demand for wheat is in- 
fluenced by any change in the money market which 
governs the amount or rate of bank loans. We have 
already discussed this factor and understand its influ- 
ence. When loans are curtailed, or when the rate of in- 
terest rises, buying is instantly and certainly diminished. 



PRICES 163 

that is to say, the demand for grain weakens. (3) A 
change in the purchasing power of the consumers of 
wheat may have an important influence upon its de- 
mand. Wheat is mainly consumed in the form of 
flour. When employment is abundant and wages are 
high, more bread is sold and at better prices; on the 
other hand, during periods of depression, when most 
people are economizing, the demand for flour is likely 
to be somewhat weakened. (4) Any change in the 
consumption habits of the flour buyers that would make 
flour a less desirable element in their dietary must in- 
fluence the demand. An example of this is. the intro- 
duction of corn meal into the dietaries of Western 
Europe. If the European peasant can be persuaded 
to substitute corn meal for rye and wheat flour, the 
demand for wheat and rye may be considerably affected. 
(5) Any special cause may influence the demand, such 
as the outbreak of a war, which would increase the con- 
sumption of flour for army purposes. 

122. Method of operation of these factors. — Any 
one of these causes may operate upon the price of wheat. 
It is conceivable indeed that all these causes may unite to 
force prices up or to force them down. Usually, how- 
ever, these/ influences pull in different ways. If the 
crop is short in the United States, it is likely to be large 
in the Argentine Republic; or a stringency in the 
money market may force sales sufficiently to offset the 
effect of rumors of crop failure, or rumors of a 
European war may coincide with the reports of a large 
wheat crop. All these forces which have been men- 
tioned and others besides them are constantly in opera- 
tion, and the price of wheat on any given day is the 
result of the joint operation of these various influences. 

These price-making influences do not actually come. 



164 ECONOMICS 

into operation before the price is affected. A large 
number of dealers, speculators and maiiufacturers are 
constantly endeavoring to foresee the operation of these 
forces, and either to buy or sell, as the prospect of profit 
directs. Months before the harvest the amount of the 
harvest has been forecasted. If the crop is to be short, 
the dealers know that the price of grain will rise, and 
although the current supplj^ of wheat may not be 
changed, yet in anticipation of a future diminution in 
the supply of wheat, the price of wheat is instantly ad- 
vanced. Competition between dealers will inevitably 
result in registering the effect of any marked influence 
upon the price of grain as soon as it is clearly perceived. 
Our analysis of the influences which affect the price 
of grain might be duplicated in the case of every other 
conmiodity. In each case, there are the same influences 
operating to affect the supply and the demand, and in 
each case the results of the interaction of these in- 
fluences and forces is a particular price for a particular 
commodity at a particular time. These prices, more- 
over, are constantly changing, as, in the estimate of the 
dealers, one influence or another is most likely to be 
affected. Nothing is more irregular and unstable than 
market prices. They fluctuate within narrow limits 
dozens of times each day, and considerable changes, ex- 
tending to 15 or 20 per cent, and in the case of such 
commodities as iron to 100 or 150 per cent, may be 
accomplished within a year. 

We may simply say that under the pressure of an exterior 
cause — competition — and only where this pressure exists, the 
cost of production and the value of the product always tend 
to coincide. This relation is one of the most important in 
political economy, but it does not by any means indicate the 
cause of value. 



PRICES 165 

In a word, we must conclude with regard to exchange value, 
as well as with regard to value in general, that it is fruitless to 
seek a single cause or basis. The best way out of the difficulty, 
as Stanley Jevons and M. Vilifredo Pareto have proposed, is 
to remove the word "value" from the economic vocabulary and 
substitute the expression "exchange relation." It is indeed only 
a relation ; the causes of this relation are not so important as 
the conditions which it must fulfill. These conditions may be 
reduced to two, which together are necessary and sufficient : — 

( 1 ) The current price must be such that demand and supply 
coincide exactly, for it is evident that there cannot be more 
merchandise sold than bought, nor, inversely, more bought than 
sold. 

(2) The current price must be such that all parties (sell- 
ers and buyers), even the least favored, secure a gain in utility. 
For it is evident" that if there is not an advantage of some sort for 
both parties to an exchange, the transaction will not take place. ^ 

123. Utility to consumer a factor in determining 
price. — ^Although market prices may change and fluc- 
tuate in the manner just described, they are, however, 
in the last analysis, determined by the comparative 
utility of commodities and money to their consumers. 
The intending purchaser of a commodity has money. 
This is valuable to him because it gives him command 
over every other commodity. He is offered a partic- 
ular commodity, say flour, at $5 a barrel. He balances 
the utility of $5 against the utility of the other com- 
modities that $5 represents to him. If flour is indis- 
pensable to him, he would rather pay $10 or $20 per 
barrel than go without it. If, however, as in most 
cases, the commodity is not indispensable, he may reduce 
his consumption of flour to a half barrel and buy some- 
thirjg else to take its place. This tends to weaken the 

1 Charles Gide, " Principles of Political Economy," Book III, Chapter I, 
pp. lOK 195. 



166 ECONOMICS 

demand for flour at the price of $5, and if the unwill- 
ingness to pay $5 is general, it will in time bring down 
the price so that the stocks on hand can be disposed of. 
The upper limit of any price, therefore, is the utility 
of a given supply of that commodity to the consumer, 
as compared with the utility of other commodities that 
money will command. The lower limit is the cost of 
production of that portion of a given supply which is 
produced under conditions of the greatest disadvan- 
tage. When the point is reached in the decline of any 
price where a large number of the producers are 
operating at a loss, they will be unable to continue pro- 
ducing and their retirement from the field of production 
will curtail the output. Unless their competitors can 
make up the deficiency, the supply will fall off, and 
as a result the price will be raised because of the bidding 
that takes place among buyers for the decreasing out- 
put. 

A good illustration of the effect of declining prices 
in reducing production was furnished during the early 
90's when the wheat farms of Western Kansas and 
Nebraska, where wheat growing is uncertain, were 
abandoned because the price obtained no longer paid 
the expenses of production. Another illustration was 
furnished in the autumn of 1893, when the price of 
silver declined some 40 per cent within "a few months. 
A large number of silver mines throughout the West 
and in other countries were immediately abandoned, 
and had it not been for the fact that the demand for 
silver was permanently reduced, the price would have 
advanced as a result of the decrease in supj^ly. To 
repeat, the upper limit of price is the utility of a com- 
modity offered for sale as compared with the utility 
of money which represents all other commodities. The 



PRICES 167 

lower limit is the cost of production of a sufficient 
amount of the commodity to influence the supply on 
the market. The actual price usually lies somewhere 
between these two extremes. 

124. Price fluctuations and their cause. — One of the 
most interesting phenomena of modern times has been 
the extensive changes that have taken place in prices. 
Beginning with 1850, prices of all commodities all over 
the world rose until 1873. From that time until the 
period of 1893-96 prices moved with few interruptions 
steadily downward and declined almost 50 per cent from 
their maximum figures, which were reached in 1873. 
Since 1896 the movement of prices has been upward. 
The primary cause of these extensive fluctuations in 
prices was a progressive and long-continued alteration 
in the relations between the amount of the medium of 
exchange, composed of money and credit, as we have 
already described, and the amount of commodities of- 
fered for sale. The production of gold for many years 
after 1873, owing to certain peculiar difficulties attach- 
ing to that industry, failed to increase on the same 
scale as the production of wheat, iron, coal and other 
commodities. Owing to the fact that the production 
of gold limits the amount of promises to pay gold and 
the amount of credit that can be issued by the govern- 
ment and banks to serve as the medium of exchange, 
the result of this relative decline in the production of 
gold was that the commodities that were exchanged 
for money increased more rapidly than the supply of 
the medium of exchange. In consequence we experi- 
enced a prolonged and severe fall of prices from 1873 
to 1896. This fall of prices was more disastrous be- 
cause it followed twenty-three years of rising prices 
from 1850 to 1873. During this period the produc- 



168 ECONOMICS 

tion of gold increased more rapidly than the production 
of the commodities that were exchanged for money. 
As a result of the increase in the production of gold, 
the supply of all kinds of promises to pay gold in- 
creased with great rapidity, and the medimn of ex- 
change was largely expanded. The consequence was 
that the value of money, measured in terms of the 
commodities for which money was exchanged, rapidly 
declined. In other words, prices rapidly advanced. 
From 1896 to 1913 again, as a result of the rapid in- 
crease in the production of gold, the movement in the 
medium of exchange has overtaken and passed the 
increase in the production of commodities, and we have 
seen again the phenomenon of rising prices that we 
experienced from 1850 to 1873. 

These prolonged changes in prices affecting all com- 
modities in the same direction, although not of course 
to the same extent, are likely to be experienced so long 
as business is transacted. Since all commodities are 
produced to be exchanged for the medium of exchange, 
and since the primary use of the standard metal is to 
be exchanged against commodities, the value of money 
in terms of commodities and the value of commodities 
in terms of money will continue to be influenced in the 
long run by their relative supplies. First, the produc- 
tion of gold, and then the production of commodities 
will increase the more rapidly, and prices will rise or 
fall to correspond. A price movement requires a num- 
ber of years for its completion but what the business 
man is primarily concerned with is the weekly, monthly 
and yearly movement of prices, and it is with these 
movements that we have chiefly concerned ourselves. 



CHAPTER VI 

INTERNATIONAL EXCHANGE 

125. International payments. — If we take the sta- 
tistics of merchandise exports and imports of the United 
States for the ten years ending with 1912, we find that 
they amount, in the aggregate, to over thirty billions 
of dollars. This enormous amount of money repre- 
sents the total purchases and sales of the United States. 
Every one of these transactions was made in terms of 
money — American dollars, English pounds sterling, 
French francs, etc. 

The only money recognized in international trade is 
gold. Outside of the country which uses it no form 
of token or representative money or bank notes passes 
current. These vast transactions were, therefore, ex- 
pressed in terms of gold. Since they represented bona 
fide sales for which purchasers were obliged to pay, and 
since the}^ were between citizens of the United States 
and citizens of other countries, we would naturally ex- 
pect to find a large movement of gold exported and 
imported in settlement. 

On examining the statistics of the exports and im- 
ports of gold, however, we find that their total amount 
during this period was only $1,540,000,000, or about 
one-twentieth of the total purchases and sales. It is 
evident that these enormous transactions were settled 
in some other way than by the shipment of gold coin 
and bullion back and forth across the ocean. The man- 

169 



170 ECONOMICS 

ner in which this settlement is made we shall consider 
under the head of the International Exchanges. 

126. Domestic exchange. — Let us begin our discus- 
sion by examining the situation in local exchange. We 
have already seen that different cities and localities are 
specialized to the production of particular commodities. 
For example, Fall River, JNIassachusetts, is almost en- 
tirely devoted to the production of cotton goods; Kan- 
sas City, Missouri, is a centre of the meat and grain 
industries; Pittsburgh specializes in iron and steel. 
We may, without departing too far from reality, speak 
of Fall River as a cotton city, Pittsburgh as a steel 
city and Kansas City as a meat and grain city. The 
other industries carried on in these several' communities 
are, compared with their leading activity, unimportant. 
The people of each of these cities buy everything which 
is produced; all kinds of commodities ready for the 
consumer, as well as enormous quantities of raw ma- 
terial and machinery. Each of these cities, in other 
words, draws upon the whole world to supply its de- 
mands, importing every year from every part of the 
world thousands of commodities. How are these com- 
modities paid for? 

Our study of the deposit currency supplies us the 
answer. The Fall River mills are coutinually selling 
cotton cloth to all parts of tlie world; Pittsburgh is 
selling iron and steel; Kansas City grain and meat. 
These commodities are paid for by checks, drafts, bills 
of exchange, which are deposited in the banks of these 
three cities, and the proceeds collected in the regular 
way. Out of these bank deposits is paid, directly or 
indirectly, all tlie indebtedness of the business men of 
Fall River, Pittsburgli and Kansas City to the people 



INTERNATIONAL EXCHANGE 171 

who work for them and who sell them goods, and so 
these deposits furnish the inhabitants of these cities 
with the means of paying for all the commodities which 
are imported for their use. These payments are made 
by checks and drafts drawn on the deposits in the banks 
of these cities. They may be deposited in the bank by 
manufacturers and dealers who have sold cotton cloth, 
steel, grain or meat, to purchasers residing in all parts 
of the world, or by store keepers and other local bus- 
iness men who, as we have already seen, have received 
payment out of the money which the manufacturers 
and dealers have paid out,- and which has been taken 
from their deposits in the banks. These deposits orig- 
inated in the sale of cotton cloth, steel, grain and meat. 
We reach then the conclusion that Fall River pays for 
all her imports with the cotton cloth which her manu- 
facturers export; that the steel exports of Pittsburgh 
pay for all the commodities shipped into that city, and 
that the grain and meat which Kansas City is constantly 
exporting serves to furnish the means of payment 
for all the imports into Kansas City. 

127. A similar method employed in the international 
exchanges. — If the" steps leading up to this conclusion 
are clear, it will not be difficult to understand the proc- 
ess of liquidating the various obligations which arise 
in the course of international exchange without the 
shipment of more than a small percentage of the money 
which these transactions represent. If the explanation 
of the process of domestic exchange has been under- 
stood, we can understand why the United States can, 
within ten years, do thirty billion dollars of international 
business while exporting and importing only $1,540,- 
000,000 of gold. 



m ECONOMICS 

The explanation is briefly this: the United States 
pays for her imports with her exports. This transac- 
tion is accomplished in almost exactly the same method 
as that which is employed in the settlement of inter- 
nal obligations. The leading exports from the 
United States are food-stuffs, cotton, manufactured 
commodities, mainly iron and steel, petroleum and lum- 
ber. The leading imports are sugar, coffee, india rub- 
ber, wool, hides and a great variety of products ready 
for consumption. Every sale of wheat or cotton by an 
American exporter entitles the exporter to receive a 
certain amount of money ifl the country to which the 
shipment goes. Every purchase by an American im- 
porter obligates the importer to pay a certain sum of 
money in the country in which he has made his purchase. 
The exporter, therefore, since he has the right to receive 
money in Liverpool, draws a draft on the English pur- 
chaser of the grain, instructing him to pay to the per- 
son named in the draft, say £1,000 ($4,886). He 
takes this draft to a banker who has a correspondent 
or a branch in Great Britain, and after endorsing it 
and attaching the invoice, bill of lading and the marine 
insurance policy, he sells it to the banker who charges 
him a small amount for the service. He pays him 
the $4,886 (£l,000) to which he is entitled in Liver- 
pool, less a small amount as his profit. In this way the 
exporter is receiving his money immediately, when in 
the absence of some such arrangement he would be 
obliged to wait for the delivery of the goods and the 
shipment to him by his Liverpool debtor of the amount 
of his purchase price in gold. The banker who has 
paid this bill sends it abroad to his English correspond- 
ent, who presents it to the purchaser of the grain for 
payment. When the bill is paid the proceeds are de- 



INTERNATIONAL EXCHANGE 173 

posited in England to the credit of the American 
banker. 

128. Essential elements of the transaction. — Now 
observe how this export of grain is utihzed to pay for 
an importation. At the same time that the banker has 
purchased from the exporter of grain the right to re- 
ceive £1,000 in Liverpool as the purchase price of the 
grain, the American importer of cloth has agreed to 
pay in Liverpool the same amount, £1,000. He can 
pay this in one of two ways: either by drawing from 
his bank the amount of gold represented by his debt 
and shipping this on a fast steamer at a cost of about 
2.43 cents for each $4.86 which he sends, or he can buy 
from an international banker the right to receive 
£1,000 in England, expressed in the form of a draft 
by the banker on his English correspondent, and he 
can send this draft to his English creditor, who will 
collect it from the banker on whom it was drawn and 
obtain his money. The second method is almost in- 
variably chosen. The American banker has a credit 
with his English correspondent as a result of the col- 
lection of the bill of exchange drawn against the export 
of grain for £1,000. He is, therefore, in a position 
to sell, of course, at a profit to himself, a bill against 
that correspondent. This is purchased by the Amer- 
ican importer of cloth, who straightway sends it 
through the mail to the Englishman from whom he has 
made his purchase. The English exporter, as soon as 
he receives the bill, deposits it with his own bank to 
be collected from the bank on which it was drawn. 
Therefore the export of grain paid for the import of 
cloth and no money passed between the two countries 
in a transaction involving approximately $10,000. 
129. International eoocliange an offsetting of credits. 



174- ECONOMICS 

— It is in this manner that international indehtedness 
is settled. Those who have rights to receive money in 
England, France and Germany and in every country 
with which the United States has dealings, sell these 
rights to receive money to international bankers. The 
drafts so purchased by the bankers are sent abroad to 
their correspondents for collection and the proceeds are 
deposited to their credit. All those Americans who 
have money to pay abroad for any reason obtain the 
means of j^ayment from these same international bank- 
ers who sell them drafts upon their foreign correspond- 
ents entitling them, when the drafts are presented, to 
receive money in the currency of the country where 
they have payments to make. It is with these drafts 
that foreign payments are made. 

There is no essential difference, then, between the 
method of settling foreign transactions and those which 
are employed in domestic business. Every city in the 
United States pays for what it consumes by checks 
and drafts drawn against deposits in its banks, which 
deposits have originated in the sale of commodities 
which it has exported. So every country in its dealings 
with the outside world settles its obligations by drafts 
against credits, which originate for the most part in 
shipments of merchandise, and as in domestic transac- 
tions, it is only the balance which remains after offsetting 
tlie credits of a city against its debits which is sent to 
it or received from it in actual currency, so in inter- 
national transactions, the exports and imports of gold 
are small because they represent merely the amoimt of 
international indebtedness which is not balanced by in- 
ternational credits. 

130. Oilier sources of hills of exclian^e. — Up to tliis 
point in our discussion of international payments, we 



INTERNATIONAL EXCHANGE 175 

have assumed that these originate in the sales of com- 
modities. There are, however, many other sources of 
United States indebtedness to the world and of the 
world's indebtedness to the United States. Americans 
every year in foreign travel spend from a hundred to 
a hundred and fifty million dollars. Their expense 
must be paid by the purchase of bills of exchange in 
the United States drawn against American credits in 
Europe. American corporations have obtained large 
amounts of money to invest in various enterprises from 
European investors. The interest on these European 
investments in the United States amounts to a large 
sum which must be paid by the purchase of drafts in 
the United States. 

Again, nearly all the foreign trade of the United 
States is carried on by vessels which are owned by 
foreign countries. The freight charges on our foreign 
trade, therefore, must be paid abroad, and these pay- 
ments are made in the same manner by the purchase 
of bills of exchange in the United States. As a result 
of these payments which are made in addition to the 
obligations incurred on account of the purchase of 
foreign merchandise, it is necessary for the United 
States to export a much greater value in commodities 
than is imported. Europeans do not travel largely in 
the United States. The American Merchant Marine 
performs few services for Europe, and American 
investments in Euroj^e are trifling. We have, there- 
fore, to receive very little money on these accounts, 
while our payments for these purchases are enor- 
mous. 

131. A large surplus of commodities must he ex- 
ported. — It is necessary, therefore, that the United 
States should export commodities sufficient in value, 



176 ECONOMICS 

not merely to balance the importations of foreign mer- 
chandise, but also to give to the bankers of this country, 
credits against which they can sell bills of exchange 
in sufficient amount to meet the expense of American 
travel in Europe, interest and dividends paid to for- 
eigners and a large part of the charges on American 
foreign trade. We find this conclusion borne out by 
the statistics of our foreign trade. From 1903 to 1912, 
the period previously examined, the excess of exports 
over imports, gold shipments being included, was 
$4,405,228,401, which was approximately the amount of 
foreign obligations due to Americans in excess of the 
amount of their indebtedness on account of merchandise 
purchased from foreign countries. This difference be- 
tween exports and imports is found in the foreign trade 
statistics of every country. In England, for example, 
the balance is in favor of imports. England has enor- 
mous investments in foreign countries and the interest 
and dividends on these investments must be sent to 
her in the form of bills of exchange drawn against im- 
portations of merchandise into England, from which 
the countries who send them will receive no other 
payment than the discharge of their obligations in- 
curred on account of interest, dividends and carrying 
charges. 

132. The international income account, — On the basis 
of the foregoing discussion it will be possible to under- 
stand what is known as the international income ac- 
count, which should be headed "The United States in 
Account with Foreign Countries." This account takes 
into consideration not only the imports and exports of 
merchandise and gold, but also all other transactions 
giving rise to debts between nations, as follows : 



INTERNATIONAL EXCHANGE 177 

DEBIT. CREDIT. 

Imports of merchandise Exports of merchandise. 

Payments of interest and dividends Payments of interest and dividends 

on American bonds and stocks on European securities owned by 

held in Europe. Americans. 

Freight and passenger charges paid Expenses of European travel in 

to foreign vessel owners. the United States. 

Expenses of American travel in Loans made to bankers and others 

Europe. in the United States. 

Payment of foreign loans. Purchase of American securities. 

Purchase of foreign securities. Remittances to immigrants in the 

Remittances by European immi- United States. 

grants into the United States to 

their friends left at home. 

On the debit side of this account appears all the pay- 
ments which citizens of the United States are obligated 
to make to citizens of foreign countries, grouped under 
their leading classes. On the credit side appears a 
classified description of the payments which citizens of 
the foreign countries are obligated to make to citizens 
of the United States. The leading items have already 
been mentioned, but we will repeat them in a brief ex- 
planation of this statement. On the debit side there 
are imports of merchandise, payments of interest and 
dividends on American stocks and bonds held in Eu- 
rope; freight and passenger charges paid to foreign 
vessel owners, and expenses of American travel, the 
paj^ment of foreign loans, purchase of foreign securi- 
ties and remittances by European immigrants into the 
United States to their friends left at home. Obliga- 
tions under each one of these heads must also be dis- 
charged by the purchase of bills of exchange drawn 
against credits established by American bankers abroad. 
An interesting portion of the study of foreign ex- 
change concerns the causes which influence the prices of 
foreign bills. These causes are described by Lord Gos- 
chen in his "Foreign Exchanges," as follows: 

1—12 



178 ECONOMICS 

When the foreign exchanges are in actual operation, and ad- 
justments of accounts are taking place between different coun- 
tries, it appears at once that, though the purchase and sale of 
foreign bills originally represent a simple transfer of debt, and 
thus, at first sight seem to exclude the idea of varying prices, 
the value of these bills is, nevertheless, in a state of constant 
fluctuation. The enumeration of the various elements of value 
which detennine these differences in price forms the next step 
in our inquiry, and is rendered possible by the fact that, while 
every instance of such variations admits of a special practical 
explanation, all are, nevertheless, subject to well defined gen- 
eral laws, and capable of scientific analysis. 

The primary difference of value clearly arises, as was previ- 
ously pointed out, either from the aggregate amount of the 
claims of any given country upon others exceeding the sum of 
its liabilities to them, or, vice versa, falling short of that sum. 
In the first case, those who have bills to draw (whom for the 
sake of conciseness we will call the exporters, though the class 
embraces all those who have claims of any kind on foreign 
countries ) will not find sufficient purchasers to take all their bills ; 
for only those will buy who have debts abroad to settle, and 
these debts are by our hypothesis of less amount than the claims. 
Accordingly the exporters, competing with each other for the 
sale of the bills, will take less money for them than their nominal 
par value; that is to say, will sell them at a discount. In the 
second case, the importing class, those who have incurred liabil- 
ities to foreigners, having, by our hypothesis, larger remit- 
tances to make than the exporters can supply to them, bid 
against each other for such bills as may be got, and pay a 
premium to secure them. In both cases, what exporters and im- 
porters are seeking to avoid is the transmission of bullion, with 
all the sacrifices thereby entailed, and accordingly the extent of 
the premium or discount which can be given is determined by 
the extent of these sacrifices. Let us suppose that importers 
foresee that the bills which they will be able to procure, will 
not suffice for all tlio payments whicli tiicv have to make. They 
at once become aware that the balance will have to be remitted 



INTERNATIONAL EXCHANGE 179 

in bullion ; and each individual, to avoid this necessity falling 
to his share, hastens to offer a slight premium to those who 
draw, intending by this small sacrifice to secure himself against 
the greater loss in freight, insurance and interest, which is al- 
ways involved, in the remittance of bullion. The premium may 
rise to within a fraction of this expense or loss ; nay, may even 
reach that actual point ; because though the premium be paid for 
the bill and the cost of specie remittance were absolutely equal, 
it would still be more convenient to send the bill. Beyond this 
point the balance of trade cannot cause the premium to rise, nor 
on the other hand, can it cause the discount at which bills are 
sold to exceed the sacrifices which exporters would incur, if they 
found themselves obliged to instruct their foreign debtors to 
send them bullion, in consequence of bills upon them no longer 
being saleable. The time, however, when they would receive 
payment would, in this case, be an important consideration. As 
long as the exporters can find purchasers for their bills, they 
get payment at once ; but when they cannot dispose of their 
bills anymore, they are not reimbursed for the value of their 
exports till the equivalent for them is returned in gold. Ac- 
cordingly each individual will submit to a sacrifice in order to 
sell his bills before the demand for them is exhausted, but the 
discount will not be greater than the estimate which the seller 
makes of the sacrifices which have been pointed out. The re- 
sult becomes perfectly clear when stated in actual figures, espe- 
cially if an illustration can be found where the par value of the 
bills drawn between two commercial centers is not hidden or ren- 
dered more complicated by differences of currency. New 
Orleans and New York, before the secession, when their respec- 
tive currencies had not been disturbed and divided by independ- 
ent issues of inconvertible paper money, supplied an instance in 
point. Under the hypothesis of an identical currency, if at 
any time the amount of bills on New York offered for sale in 
New Orleans equalled the amount of remittances required for 
the payment of debts due to New York — that is to say, if the 
indebtedness of the two cities reached a point of equilibrium — 
the price to be paid for a bill for one hundred dollars payable 



180 ECONOMICS 

in New York at sight (for difFercnccs in point of time, and 
consequently interest, should at this stage be eliminated), would 
be exactly one hundred dollars. In proportion, however, as it 
might become evident, that a greater sum was due New York 
than could be drawn against the claims of New Orleans upon 
that city, those who were bound to remit would hasten to pay 
a small premium to the drawers, and give them one hundred 
dollars and a half, under the apprehension that if they did not 
secure these bills, they might be obliged to send gold, which 
might cost them one and a half dollar for each one hundred 
dollars in freight and insurance. Thus the more clearly it ap- 
peared that the stock of bills was growing insufficient, and the 
more the supply actually diminished— the higher the premium 
was sure to rise, till the sellers might realize almost one and a 
half dollar profit. At this point the profit was clearly so high, 
that it would be indifferent to the remitters whether they bought 
bills or sent the gold, and some would dispatch gold and others 
would send bills, the surplus excess required to be remitted be- 
ing in the meantime gradually lessened by this dispatch of gold. 
The exporters being less pressed for their bills, soon had the 
opportunity of feeling the change in the situation, and might 
content themselves with a smaller premium in order to secure 
some profit before the demand was entirely satisfied. The result 
would be a fall in the price of bills, till the exchange stood 
once more at par, or below it. Conversely, if at any time there 
were more bills than purchasers for them, the drawers feeling 
that their export business might have to bear the charge of 
one and a half per cent for bullion shipped to them from New 
York as returns, were ready to sell at a discount long before 
that point was reached; a discount would, however, not exceed 
the charges on bullion shipments, whicli, in the case in point, 
we have supposed to be one and a half per cent. It is a clear 
deduction from these considerations, that the limits within which 
the exchanges may vary (provided the bills are drawn at sight 
and in the same currency), are, at the one extreme, the par 
value plus the cost of transmission of bullion ; at the otiior 
extreme, the par value minus this identical sum. Tractically 



INTERNATIONAL EXCHANGE 181 

the exchanges rarely touch either extreme, but fluctuate between 
them, owing to the various measures and influences brought to 
bear upon the situation before the extreme case arrives, which 
cause a reaction in the opposite direction. 



PART III: DISTRIBUTION 

CHAPTER I 

FORMS OF OWNERSHIP 

133. Four inte?'ests in every business. — The three fac- 
tors in production — natural agents, labor and capital — 
were originally, in a primitive state of society, united 
under the control of single producers. Even to-day 
we find numerous examples of this union. The farmer 
and the blacksmith unite the three factors of produc- 
tion, and a large number of small manufacturers and 
traders do the same. When industry is conducted 
on a large scale, however, as modern industry almost 
universally is, the ownership of the factors in produc- 
tion is separated. One man owns the land on which 
the factory is erected ; another man furnishes the funds 
to build and equip the plant and to finance its operation. 
The labor is supplied by a third set of men, and the 
owners of the business, who take the risks and receive 
the profits, constitute the fourth. These four interests 
are found in every large business. 

134. The entrepreneur. — We find that the conduct of 
production is to-day in charge of business management 
called entrepreneurs. The English equivalent of this 
word is imdertaker. The entrepreneur is the man who 
undertakes the conduct and the responsibility of produc- 
tion. These men buy or hire land or natvu-al resources, 
they employ labor and they use either their own funds 
.or the funds that they borrow to erect and equip build- 

18^ 



FORMS OF OWNERSHIP 183 

ings, buy materials and operate their farms, factories, 
shops or mines. They own the product and they sell 
this on the best terms obtainable, thus replenishing their 
funds which are constantly being invested in wheat, 
cotton cloth, pig iron, coal and wages, in order to carry 
on the productive process. The entrepreneur assumes 
all the risks of being able to sell his product at a price 
exceeding the cost of production. He determines what 
goods shall be produced, in what quantities and at what 
places. Through his hands, every other member of the 
community, from the richest bondholder to the poorest 
laborer, receives his income. The entrepreneur, in other 
words, although he is working for his own profit, dis- 
tributes the income of society, and it is from his stand- 
point that we must consider the operation of distribu- 
tion. 

135. Three forms of entrepreneur. — There are three 
forms, in the eyes of the law, which the entrepreneur 
may assume. First, the individual; second, the part- 
nership, and third, the corporation. Everyone can call 
to mind some very large individual owners. John 
Wanamaker of Philadelphia, and the late Marshall 
Field of Chicago, are conspicuous illustrations of great 
business responsibilities largely assumed by single 
owners. There are two reasons why individual owner- 
ship is undesirable. One of these reasons is that the 
credit of the concern is always higher in a partnership 
than in the case of an individual owner, and the other 
is the necessity that there shall be a number of partners 
as the business grows so that they can constitute an 
organization and give undivided attention to various 
departments of the business in a way a single individ- 
ual cannot. 

136. The partnershijy. — A partnership is formed by 



184 ECONOMICS 

the association of two or more persons for carrying on 
business, and dividing profits between them. The 
members of the partnership are called partners and the 
partners constitute the firm. Partnership is the result 
of an executed contract between the members. This 
contract may be either written or oral. Of course, if 
oral, it must be substantiated by evidence. The written 
agreement is known as the articles of copartnership. 
It is usually arranged under the following general 
heads: First, the name of the partners; second, what 
the capital shall consist of and the respective contribu- 
tions; third, the definition of the objects and purposes of 
the partnership; fourth, the right of each one to draw 
out certain sums for his own expenses; fifth, the book- 
keeping and accounting; sixth, any special permissions 
or prohibitions such as not allowing either partner to 
make or endorse accommodation paper. 

137. Kinds of ijartners. — There are various kinds of 
partners; first, the public or open partner; second, the 
secret partner; third, the nominal partner; fourth, the 
silent partner, and fifth, the special partner. These 
distinctions are very vital to the partners, but they 
amount to little as between the partners and the public. 
The general rule is that the liability of a partner is 
absolute, if you can get at him. The definition of a 
partner is anyone who has an intention to share in the 
profits and losses of a business. He is a party to the 
contract, he has a voice in the direction and control of 
the business, and he is the one who invests his capital 
and labor in the undertakings. 

A partner has certain rights ; they are, first, the right 
of choosing his associates. A result of that general 
rule is that an interest in a partnership cannot be pur- 
chased by an outsider without the consent of all the 



FORMS OF OWNERSHIP 185 

partners. Second, he has the right to participate in the 
management of the business. Third, he has the right to 
sell any part of the property which is kept for the pur- 
poses of the partnership, but he has no right to sell any 
property which is not intended to be sold. 

A public partner is one whom the public recognizes 
as a partner in the concern to be responsible for its 
conduct and liable for its debts. A secret partner is 
one whom no one knows anything about. He conceals 
his identity; therefore, he does not become liable, for 
nobody knows who he is. A nominal partner is one 
who allows others to use his name for the sake of the 
standing it will give the concern. A silent partner is 
a man interested in the concern, but not active in it. 
In some states he is free from liability. A special 
partner is a partner interested in the firm only to a 
limited amount. 

The capital of the partnership is usually considered 
to be the amounts contributed to the common fund, and 
the right of either partner is not to any special part of 
the capital, but to share in the proceeds of the whole 
after the firm's debts are paid. Good-will may be de- 
fined as the benefit arising from the reputation of a 
firm. The good-will of a partnership, individual or 
corporation, is embodied in the name of the business. 
The good-will is in the name, and for that reason the 
name of a partnership or corporation is carefully safe- 
guarded by the law, and another firm of individuals 
is not allowed to appropriate the name of an existing 
business. 

138. Obligations of jmrtners. — The first and most 
important obligation which one partner owes the other 
partners is good faith, for every partner is to a large 
extent at the mercy of every other partner. Each part- 




186 ECONOMICS 

iier is also chargeable with loss arising through his 
own negligence, but not for any losses resulting from 
an honest mistake in judgment. Each partner is also 
liable for all the debts of the partnership. 

The limitations of a partner's authority are as fol- 
lows: He has authority to bind the firm by contract 
within the scope of the partnership business. All part- 
ners are liable for fraud committed by any one of them. 
It is held further that notice to one partner is notice 
to all the other partners. 

In proceedings against a partnership, it is not looked 
upon as a unit, but as a collection of individuals. So, 
as a general thing, proceedings against partnerships 
are carried in the various individuals' names and not 
in the firm name. It very often happens, also, that in 
cases of dissolution of a partnership, a conflict arises 
between the partnership creditors and the individual 
creditors. In this case the individual creditor has to 
give way. If something remains after the debts of 
the partnership are settled, it can be applied to the debts 
of the individuals. 

139. IDuration and dissolution of partnerships. — The 
duration of a partnership is usually limited by the ar- 
ticles of copartnership, but it rasiy be dissolved in a 
number of different ways. First, by a provision in 
the articles; second, by mutual consent; third, by the 
act of one or more of the partners ; fourth, by a change 
in the partnership; fifth, by death of a partner; sixth, 
by decree of a court of equity ; seventh, by bankruptcy. 

The first and second methods of dissolution do not 
require any discussion. The third method is by the 
act of one or more of the partners. For example, 
when one partner makes an assignment, he becomes 
unable to fulfill his duties as a partner, and therefore 



FORMS OF OWNERSHIP 187 

the partnership is dissolved by his act. Fourth, by a 
change in the membership; when a partner withdraws 
or transfers his interest a dissolution may be effected. 
Fifth, by death; the interest of the partner dying 
descends to his heirs, and as the surviving partners have 
the right to choose their associates, the death of one of 
the original partners may result in the dissolution of the 
partnership. Sixth, by decree of court; in case of 
fraud or gross mismanagement the partnership may be 
dissolved by decree of the court. And, finally, by 
bankruptcy. 

140. The corporation. — This is a legally constituted 
association of individuals authorized by law to conduct 
business through their elected representatives, who are 
known as directors. The corporation may sue and be 
sued, may contract debt, and may conduct its business 
in any way that its directors please within the limits 
presci'ibed in the grant of authority issued by the state, 
which is known as the charter. These charters may be 
perpetual, but are usually granted for a limited term 
of years. 

The directors elect the officers of the corporation, who 
attend to its management and who report to the di- 
rectors. The directors in turn report to the stock- 
holders. If the directors are dissatisfied with the 
management, they may change the officers of the com- 
pany, and if the stockholders are dissatisfied with the 
directors' administration, they may, at any annual 
meeting, or at a meeting specially called for the pur- 
pose, choose other directors in their places. 

141. Advantages of the corporation. — The advan- 
tages of the corporation are great. It enjoys per- 
petual existence; that is to say, it is not disturbed 
by the death of any stockholder. In this it is superior 



188 ECONOMICS 

to the partnership. The HabiHty of the stockholder 
is hmited, as a rule, to the money he has invested in 
the corporation. Every partner, on the other hand, is 
liable to the amount of all his property, wherever it 
may be located, for the debts of the partnership. The 
third main advantage of the corporation is its repre- 
sentative government. The stockliolders can elect their 
representatives, the directors, in the same manner as 
the voter elects the members of the legislature. They 
can also call their representatives to account at any time 
and in this way can insure that the business is conducted 
according to their wishes. 

The control in corporate affairs goes by a majority 
of the shares of ownership, which are known as shares 
of stock. Thus a corporation may have a capital stock of 
$500,000 and if its shares are $100 par value, there 
will be 5,000 shares outstanding. Each one of these 
shares represents 1 /5000th part of the ownership in 
the corporation, and the holder of each share is entitled 
to 1 /5000th part of any profits which the directors 
may decide to distribute to the owners. Thus there may 
be 10,000 men owning a minority of stock and one man 
owning one more than half the total number of shares, 
and this man can name the directors and manage the 
corporation as seems to him good. It might be sup- 
posed that under such a system, the minority stock- 
liolders would often be treated with great injustice, 
and tliis has sometimes happened. Generally speak- 
ing, liowever, no such trouble is experienced and the 
ownership of most corporations is, moreover, so widely 
distributed as to make it extremely difficult for one 
man to obtain control. 

142. lAmitcd Jiahilit//. — The most important advan- 
tage of the corporation arises from its limited liabihty 



FORMS OF OWNERSHIP 189 

feature. A man can be interested in a number of 
industries organized under the corporate form, and can 
still give his undivided attention to a single business 
without either endangering the solvency of that bus- 
iness by his outside interests, or making any particular 
demands upon his time. His liability in each case, as 
we have seen, is limited to his interest in the property 
of the corporation. As a result, the corporation can 
draw its funds from widely different sources, and by 
uniting the contributions of thousands of individuals 
can accomplish results which would be impossible for 
an individual or a partnership to achieve. The Penn- 
sylvania Railroad Company, for example, has 75,000 
stockholders scattered all over the world. Within the 
last ten years this corporation raised three hundred 
millions of money, a large part of it by selling shares 
of stock. It would have been impossible to raise this 
money under another form of organization. 

Nearly every large business in the United States is 
now conducted by corporations. All the railroads, 
public service corporations, steamship lines and mining 
industries are so conducted, and most manufacturing 
enterprises are organized under the same form. Part- 
nership prevails among smaller manufacturers and 
small merchants, but even in these fields the corporation 
is coming to supersede the partnership.^ 

143. Industrial income — distribution of. — Let us 
now follow the entrepreneur in the conduct of his bus- 
iness and see how the gross earnings of the business are 
apportioned or distributed. In order that we may see 
exactly what this process of distribution is, a statement 
of the receipts and expenditures of the Philadelphia 

1 For further details with regard to partnerships and corporations, see 
the volumes on Commercial Law and Corporation Finance. 



190 



ECONOMICS 



tinn" 



and Reading Coal and Iron Company — a corporation 
controlling over 100,000 acres of coal land in Eastern 
Pennsylvania, and operating forty-seven collieries — is 
inserted, 

THE PHILADELPHIA AND READING COAL AND 
IRON COMPANY. 



Income 


Amount 


Total 


Coal sales 


$35,207,229.38 

248,717.75 

131,072.52 

116,283.83 

30,349.37 




Coal rents 




House and land rents 




Interest and dividends 




Miscellaneous 








Total receipts 


18,382,202.00 

2,718,374.14 

458,522 . 89 

8,135,147.50 

589,728.97 

839,742.00 

32,862.10 

6,309.10 

3,449,649.21 


$35,733,652.85 


Expenditures 
Mining and coal repairs 




Coal purchased 




Royalty of leased collieries 




Transportation and handling 




Taxes on coal lands and improvements 

Improvements at collieries, etc 




Improvements and repairs of houses 




Damages account coal dirt 




All other expenses 








Total expenditures 


$85,455 . 38 
864,083.91 


34,612,537.91 






Profit from operation 


$1,121,114.94 


Taxes and fixed charges 




Interest on Reading Company loans 












949,539.29 


Net profit 


$171,575.65 


Profit of previous years 


1,288,118.49 






Balance to credit of Profit and Loss Account. . 


$1,459,694.14 







Here is the process of distribution set out in detail. 
The company receives $35,207,299.38 from the sale of 
coal and $.520,423.47 as income from other sources., 
This income is now distributed in the following manner: 
$18,382,202.00 to wages, current repairs and supplies; 
$8,135,147.50 to transportation charges; $458,522.89 to 



FORMS OF OWNERSHIP 191 

rents (royalties) ; $1,539,268.26 to interest and taxes; 
$872,604.10 to repairs, improvements and other ex- 
penses necessary to make good deterioration of plant 
and other property; and $6,174,332.45 miscellaneous 
items not necessary to classify for the present purpose ; 
leaving a net profit for the year of $171,575.65. 

We have here illustrated the distribution of the pro- 
ceeds of industrj^ The coal and iron company leases 
the coal land and owns the collieries, conducts the busi- 
ness, mines and sells the coal and receives the proceeds. 
The sum received does not, however, remain in the 
possession of the company. Indeed, most of it has 
been paid out long before the totals on the year's oper- 
ations have been made up. 

144. Claimants to income. — This distribution is made, 
as we have seen, under five general heads: The first 
expenditure is for the labor necessary in the operation 
of the mine. The company employs many thousand 
workmen — superintendents, assistant superintendents, 
mine bosses, fire bosses, rockmen employed in driving 
shafts, miners who blast out the coal, inside laborers who 
break up and load the coal, outside laborers, employed 
outside the mines, engineers and firemen, drivers, door 
boj^s and slate pickers, and a variety of other labor. 

The second item is for transportation and is paid to 
the railroad for hauling the coal to market. This pay- 
ment is made on the basis of a certain rate per ton, and 
the rate varies according to the value of the coal. The 
larger sizes of coal are the most valuable, and therefore 
pay the highest rate. 

The payments for rentals and royalties include the 
amount paid for the hire of coal land and other property. 
The fourth item is interest and taxes. These are includ- 
ed together in the statement, but in our discussion we 



192 ECONOMICS 

shall separate them. Interest is paid on the amount of 
money which has been borrowed at different times in the 
past for the development of the property, and taxes 
are paid to the local and state governments. The fifth 
item — repairs and improvements — appears in the ac- 
counts of every business. Unless a large amount is 
spent in maintaining a plant, it will rapidly deteriorate 
and eventually become useless. In addition to the ex- 
penses for repairs, as we have seen in our discussion of 
capital, there must also be an amount spent in renewals, 
because the time comes when a piece of machinery can 
no longer be repaired and must be replaced. The sixth 
item of the list is surplus or profits. This is what re- 
mains to the owners of the company after paying all 
claims against it. 

Reserving our discussion of taxes for a later page, 
we have jiow to consider the four main shares in dis- 
tribution — wages, rent, interest and profits, and we have 
to discuss the influences which determine the shares in 
distribution which go to each of these factors. 



CHAPTER II 

CLASSES OF WORKERS 

145. The organizer. — One of America's distinctive 
contributions to the industrial world is the organizer. 
To be sure, Europe has her organizers, especially 
Germany and England and France, but in the number 
and capacity of its organizers and in their industrial 
achievements^ America far surpasses any other country 
of the world. 

The organizer is the commander-in-chief of his par- 
ticular industry. It is not his duty to do any of the 
detail work, either with his hands or his brain. His 
occupation consists in seeing that the great outlines of 
the industry as he has planned them are placed for 
execution in the hands of competent men. The 
organizer mobilizes the forces of labor and capital and 
applies them to the natural resources in a way which will 
produce the largest return for the smallest outlay. It 
is the duty of the organizer to superintend only the big 
things and leave the detail for others. One of the 
leading men in American industry once said that he 
never did anything that he could hire some one else to 
do; in other words, only the big jobs were big enough 
for his organizing ability, the smaller ones could be 
taken care of by his subordinates. 

It is the duty of the organizer to see that he has 

efficient forces to execute his ideas. This is one of the 

characteristics of a successful organizer; it is likewise a 

characteristic of any other leader of men. He must be 

I-I3 193 



19i ECONOMICS 

a sufficient reader of character to select subordinates 
M'ho will see things as he does, and after selecting them 
he must have sufficient personality to impress his will 
upon his subordinates. In short, the organizer must, 
first of all, be a leader of men. He must have the 
ability to work with and direct others, and get them to 
do the things as he wishes them done. 

146. Knowledge possessed by the organizer. — The 
successful organizer must be more or less intimately 
acquainted with the details of the various industrial proc- 
esses which fall under his control, and he must be on the 
lookout constantly for new processes which will give him 
an advantage in method over his competitors. One of 
the leading manufacturers of electrical machinery is 
particularly noted for his ability to judge of the 
character and possible outcome of an invention in his 
line. Not only does he constantly invent himself, but 
he is careful to keep in touch with all the new inventions 
pertaining to electricity and to know which of these he 
needs. 

Another thing which the organizer must know 
intimately is the condition of the markets. Before he 
])laces an article before the people and asks them to 
accept it, he must have some conception of what the 
l)ublic wants. In the first place, he must know what 
kinds of goods are in demand; and in the second place, 
he must know where this demand is most active — that 
is, where prices are highest. In addition to producing 
cheaply the article which he is manufacturing by an 
efficient organization of his labor and capital, the 
organizer must be acquainted with the best means of 
shipping and disposing of his manufactured ])roducts. 
'^ 147. Industrial importance of the organizer. — As 
alread}' stated, the organizer is 2)eculiarly ^Vmerican, 



CLASSES OF WORKERS 195 

and to the presence in America of a large group of 
efficient organizers we owe many things, the most im- 
portant of which, perhaps, are the examples of large- 
scale production which have been furnished in the steel, 
oil and beef industries, and the use of by-products in 
industry which is an essential feature of large-scale pro- 
duction. This development of large-scale production 
and the utilization of by-products are so extensive in the 
large industries of the country, and have so cheapened 
the cost of producing commodities, that the community 
is enabled to get many articles of consumption at a price 
which represents but a fraction of the cost of the same 
commodity twenty years ago. 

The organizer is important in any community of 
which he may be a part. The community revolves about 
him and he not uncommonly occupies the position of a 
feudal baron of the Middle Ages. Indeed, in many 
parts of the country to-day, the organizer, or the com- 
pany of which the organizer is the head, will own the 
factories, the mines, the houses in which the workers 
live, the stores in which the workers buy their pro- 
visions; in short, all of the economic fortunes of the 
population are controlled by one man or by his com- 
pany. This unique position of the organizer has led in 
the past to many abuses which the laws have been seeking 
for some time to correct. Among these abuses were the 
company store and the payment of wages in scrip, which 
could be exchanged for goods only at the company's 
stores. In this way the money which was paid out in 
wages to the employes was at once taken back at a 
profit in the company's stores. Both of these pro- 
ceedings are now generally illegal. 

148. How the supply of organizers can be increased. 
— The organizer has been a distinctive factor in the de- 



196 ECONOMICS 

velopment of our present industrial progress, and as 
such he is of vital importance to the community. Is it 
possible for us to insure a continuance of the supply of 
organizers, and if there is such a possibihty, what 
efforts are we making to incur the continuance of a 
supply? It is probably fair to say that we have made no 
intelligent effort along these lines. Our public school 
system as a whole is calculated to develop school-' 
teachers and clerks rather than captains of industry and 
only in the last few years have the colleges made any 
appreciable effort to furnish a course of training that 
will put a man in a position to assist in the industrial 
world. In fact, we are still in practically the same 
position that we occupied fifty years ago, when the 
organizer rose from the position of office boy, or some 
similar position, gradually learned the business as he 
went along, and succeeded in becoming an organizer of 
industry. Organizers "happen" now as they did then. 
Granted the importance of the organizer in industry, 
it would seem that our institutions should be so shaped 
as to place before the children of each generation an 
equal opportunity for the kind of an education that will 
lead to the development of organizing ability in those 
who possess the aptitude or desire to develop it. 

149. The manager. — The manager occupies a posi- 
tion in industry analogous to that occupied by the 
colonel in the army. It is the duty of the organizer to 
map out plans for carrying on the general business 
policy of the concern Avith which he is connected. The 
manager is the ]:>erson who executes the plans made by 
the organizer. It is, therefore, necessary that the man- 
ager be in close touch with the details of the business. 
The organizer may liave under his control a dozen 
cotton mills stretching from Massachusetts to, Georgia 



CLASSES OF WORKERS 197 

He has his office in New York and from it he directs 
the poHcy of the whole group of mills, sometimes visit- 
ing them, but generally leaving the details of the work 
at each mill to the discretion of his manager, who has full 
charge in each locality and is responsible to the 
organizer only. 

To be sure, there are many business operations in the 
United States in which the same man acts as organizer 
and manager; but the tendency in modern industry is 
toward a centrally located office having control over a 
large number of plants scattered through the country. 
At the central office is an organizer having charge of 
the general policy of the corporation. At each of the 
plants is a manager whose work centres around that 
one plant. The manager, like the organizer, is of com- 
paratively recent origin. Fifty years ago, in most in- 
dustries, the head of the industry came in close daily 
contact with the wage-earners. He called them by 
their first names and worked with them ; but the growth 
of large-scale production and the concentration of 
industry in a comparatively few hands have made it im- 
possible for the organizer or business head to know any- 
thing of the details of his"" operations or of his workers. 
He deals in large projects, leaving to the manager the 
problems that arise from the detail workings of the 
plants and the contact wdth the wage workers. 

The manager is the man who sees that the productive 
machine is kept running. He understands the ma- 
chinery in his particular branch of industry and he 
understands the labor market, and he brings the wage 
worker into contact with the machinery, his object being 
to secure the greatest possible production from the com- 
bination of the wage worker and machinery. 

The position of the manager is one not so hard to fill 



198 ECONOMICS 

as that of the organizer. He is not required to initiate 
new projects nor to oiithne large operations, but rather 
to work out and develop the scope of the particular 
branch of the industry to which he has been assigned. 
It is not necessary that he should have had so broad a 
business training, or that he should acquire so extensive 
a knowledge of men and things as the organizer. What 
he does need is a highly developed technical knowledge 
of his line of business, backed by a general knowledge 
of trade conditions and of the mechanism of produc- 
tion.^ 

150. The training of managers. — In America we 
have developed a high type of manager. Beginning 
with the public school system, as it has grown up in some 
of the newer parts of the country, and ending with the 
technical courses in our colleges, an opportunity is pre- 
sented for the development of those traits which lead to 
the growth of a group of successful managers. Until 
recently, in addition to those opportunities for educa- 
tion, our industries have presented a great opportunity 
for wage workers to rise from the ranks and become 
managers, and even organizers under exceptional con- 
ditions. 

The recent changes in modern industry are imfavor- 
able to the development of additional organizers, but 
favorable to the development of additional managers. 
Not onlj' must the organizer of to-day \\ii\e the ability 
to group various branches of production, to select his 
subordinates, and to market his products to the greatest 
advantage, but he must stand out against large cor- 
porations in some lines and monopolies in others, and 
every year the large corporations become larger and the 

'The work of the organizer and manager is discussed and illtislraird in Ihe 
volume on Organization and MANACiioMicNT. 



CLASSES OF WORKERS 199 

monopolies more absolute. This means that every year 
great organizers are forced into the "trust." That 
is, they go out of business as independent organizers 
find accept positions as managers under the trust. This 
trust is controlled by the organizer at its head, who is 
called a president; a number of vice-presidents, who, in 
many cases, perform the functions of organizers; and 
a group of business managers, each one of whom has 
charge of a particular operation or factory or mill. 

151. The boss. — Passing now to a discussion of the 
boss, we come upon one of the most interesting features 
of the development of labor organization in America. 
The "bosses" or "foremen" as they are called in the 
factories, stand in the position of the captains, lieuten- 
ants and corporals of a military organization, and in 
their origin they are typically American. 

The boss occupies the same position in our modern 
system that the overseer did in the slave system. It is 
his duty to see that none of the men loaf, and that they 
do their work efficiently. The manager provides the 
outlines of the work to be done, and the boss sees that 
the men apply themselves to the work and fill in the 
outlines. He is responsible for' getting the largest 
amount of labor possible from the group of wage 
workers under his charge. The immigrant comes over 
from Europe, ignorant of the language, of the kind of 
work done, and of the methods used. He is placed 
under a boss who tells him what to work at and shows 
him how to work. Then the boss must see that the 
work is of the necessary standard of quality and of the 
required amount. 

The boss does not use the whip to keep his laborers 
at work, but he does employ various means which are 
even more effective. He puts his men on a system of 



200 ECONOMICS 



H 



"piece work"; that is, tliey are paid so much per piece 
of the work that they do, instead of so much per hour. 
For example, a man may solder the bottom to the frame 
of a lantern at three cents per lantern or thirty cents 
per hour. If he works by the hour, there is no incentive 
to work hard, but if by the piece, he will do his best to 
solder at least ten lanterns an hour, and perhaps eleven 
or twelve, for each additional one means more in his pay 
envelope. Then it is tacitly understood that a man must 
solder ten lanterns an hour or leave. So the piece work 
system sets a rapid standard and places every incentive 
before the wage worker to exceed that standard. We 
shall discuss piece work in detail on a later page. 

The pace maker is another means of increasing the 
product of a gang of workers. The boss selects a 
strong man and pays him a little more than the wages 
paid the other men, on condition that this man shall set 
a rapid pace. He carries so many hods per hour, or 
wheels so many wheelbarrows per hour, and all of the 
other workers in the gang are required to keep pace 
with him or lose their positions. This system, while re- 
sulting in a larger production, bears very hard on the 
weaker members of the "gang." In addition to these 
two methods, the boss uses talk, sometimes persuasive, 
sometimes abusive, but always directed toward the one 
object of getting a large product per man employed. 

The manager and the organizer require an extensive 
experience and great executive ability. The boss re- 
quires only the ability to get along with his men and 
persuade them or compel them to work hard. The Irish 
made the first bosses, and they are still the typical ones, 
although Italians and Slavs are now taking positions as 
bosses over their own countrymen. 

152. Classes of labor in relation to wages, — Turning 



CLASSES OF WORKERS 201 

now to the questions that determine the rate of wages, 
we have first to note the distinction between classes of 
labor. In the Philadelphia and Reading Coal and Iron 
Company, we may distinguish five classes of employes: 

(1) the superintendents and assistant superintendents; 

(2) the bosses and foremen; (3) the miners and 
engineers; (4) the laborers and (5) the minor em- 
ployes. These divisions of employes are found in every 
business. Under the bosses or foremen, whose 
functions in industry we have described, come the 
skilled laborers. The skilled workman is the man who 
understands the use of certain tools, machinery or 
processes; a man who possesses, in other words, special 
knowledge which his employer can utilize to make a 
profit, and which entitles him to higher pay than com- 
mon laborers. Illustrations of skilled workmen are 
machinists, coal miners, dyers, engineers and firemen, 
carpenters, brick layers, structural iron workers. Be- 
fore qualifying as a skilled workman in any of these 
classes an extended period of training and apprentice- 
ship is required, and the special knowledge which a 
skilled workman possesses represents a large amount of 
study in the hard school of experience. Indeed, the 
difference between the skill and capacity of a machinist 
who may receive $3 a day, and the common helper in a 
foundry who is glad to work for $1.50 a day, is far 
greater than indicated by the difference in their wages, 

153. Unskilled labor. — Below the skilled laborers 
come two classes of unskilled labor. The first, con- 
sisting of those men who are preparing for skilled labor, 
is represented by the apprentices in every line and also 
by the men working in employments — like firing a loco- 
motive or helping the coal miner in his work — which are 
preparatory to skilled work commanding a high wage. 



202 ECONOMICS 

To prepare to fill the position of locomotive engineer, 
for example, a boy is first put at helping about the 
roundhouse doing a great deal of hard and dirt}^ work, 
such as cleaning out fire boxes, etc. He is then made a 
wij^er, and is entrusted with the duty of cleaning up a 
locomotive for its next run on the road. After a 
period of service in this capacity, he is put to firing on 
a freight engine; from here, if he shows ability and 
commends himself to the favorable attention of his 
superiors, he is promoted to passenger fireman. After 
a more extended period of service in this position, he 
may be sent out as a freight engineer. Finally, if he 
is sober, industrious, intelHgent and careful, he may 
reach, at the age of thirty-five or forty, the goal of his 
ambition, the position as engineer in the through pas- 
senger service. Below every skilled employment are 
men who are working just below it preparing them- 
selves to qualify as skilled workmen. These men are 
usually possessed of some intelligence and they must 
have a fair common school education. If they are 
strong and wilHng, they are certain to be advanced. 

The lowest class of labor, known as unskilled laborers,, 
l^ossess little save their physical force. The members of 
this class are lacking in intelligence, education, foresight 
and judgment. They can be trusted to. execute only 
the most simple manual tasks, and they can satisfactorily 
perform these only under the close supervision of fore- 
men. In the service of the leading railroad of the 
United States it is found necessary to have one foreman 
for every five common laborers employed. In other 
words, it pays this corporation to employ one man at $3 
a day to supervise and stimulate by precept and example 
five men who receive $1.25 or $1.50 a day. 



CHAPTER III 

CAUSES AFFECTING RATE OF WAGES 

154. Real and money wages. — Wages represent the 
amount paid for the service of physical or mental labor. 
The amount of wages is primarily determined by the 
time during which the service is rendered, as a day, a 
week, a month or a year. Wages are paid in money 
and the greater portion of these wages is expended upon 
commodities. Real wages, therefore, as distinct from 
money wages, are measured by the amount of com- 
modities that money wages will purchase. They vary 
inversely with prices. The higher the prices of the 
necessaries of life, the lower the real wages which a given 
amount of money wages will procure. This distinction 
explains, in large measure, the marked differences of 
wages between city and country, and between the 
mining camps of the West and the large cities of the 
East. Every class of employes demands a certain 
amount of the comforts and necessaries of life, an 
amount which varies according to the race, education 
and environment, and if the prices of those necessities 
and comforts rise, money wages must rise also. 

155. Illustration of distinction between real and 
money wages. — The labor situation on the Transvaal 
affords an excellent illustration of the influence of the 
prices of the necessities of life upon the real wages of 
labor. Owing to the necessity of importing practically 
everything which is consumed in the district, and to the 
cost of transjjortation, the cost of living is enormous- 

203 



i204< ECONOMICS 

111 1903, the following comparative prices of leading 
food materials on the Hand and in England were pub- 
lished : 

England. Transvaal. 

Bread, four pound loaf $ .12 $.36 

Milk, quart 06 .18 

Sugar, seven pounds 26 .52 

Eggs, dozen 20 .92 

Potatoes, fourteen pounds 14 .84 

Meat, one pound 12 .24 

The average cost of decent subsistence for a family 
of five is $122.40. These conditions necessitate high 
money wages. A mine manager on the Rand will be 
paid $680 per month ; a battery manager $2-10 ; machine 
drillers $160, and carpenters $125. White laborers can- 
not earn enough wages to permit them to live, so the 
mines are worked by native labor, Busuto, Zulu and 
Zambesi blacks, locally known as "boys," who receive 
from twelve to fifteen dollars per month and their board. 
They make fairly efficient laborers, but the cost of 
obtaining them is heavy, and the supply is inadequate. 
They are constantly deserting to return to their homes, 
often one thousand miles distant, and enjoy the fruits 
of their labors, according to the native philosophy of 
life, which is as follows: "Six pieces of white man's 
gold will buy one cow, four cows will buy a nice little 
wife ; half a dozen wives will tend my mealie patch while 
I smoke and look on." 

156. Dlstinctian between fees and wages. — We must 
here note the distinction between the fee which is paid 
to the physician, and the wages or salaries which are 
paid to the workmen or superintendents. The fee is 
a fixed price, as for example, $2 per visit, which is fixed 
by custom in much the same way as retail prices are 



CAUSES AFFECTING RATE OF WAGES 205 

fixed, and is not affected by the time during wliicii the 
service is rendered, nor by the intensity of the demand 
for the service. A man whose child is dying would 
cheerfully give all that he possessed to the physician 
who might save its life, but the charges of the physician 
are not increased on this account. In the field of in- 
dustry, however, the prices paid for services rise and fall 
according to the demand for those services. 

157. How 7'ates of wages are determined. — In each 
of the classes of labor a certain rate of wage is estab- 
lished which is fixed by the custom of the trade and 
which changes very slowly. The general superin- 
tendent of a large coal mining company, for example, 
may be paid $15,000 per year; district superintendents, 
$5,000; the foremen and bosses, $1,000 to $1,500; the 
miners and engineers, from $60 to $100 per month; com- 
mon laborers, from $35 to $50; and minor employes, 
boys and old men, from $15 to $30. 

The lower limit of this rate is the wages either of the 
next lowest class or of some alternative employment. A 
locomotive engineer, for example, will not work for less 
wages than those paid to locomotive firemen. The 
machinists' wages will never fall to the level of a 
machinist's helper. The lower hmit of wages also de- 
pends upon those of some alternative employment, such 
for example, as farming. Farm wages have advanced 
rapidly in the United States in recent years, and there 
are few farming districts where a strong and willing 
worker, no matter how unskilled in farming operations 
he may be, cannot receive $20 a month and his board. 
In the northeastern section of the country it is fre- 
quently possible for a man and his wife to secure em- 
ployment together with board at wages from $30 to $40 
a month and board is equivalent to a wage of $1.50 a) 



206 ECONOMICS 

\. 

(lay. It is therefore impossible to force tlie wages of 
unskilled labor in a city or in the factory districts, 
located in the country, below this figure. Tlie upper 
limit of wages is the value of the laborer to the em- 
ployer. The standard rates of remuneration within 
each class are fixed by the demand for the labor of that 
class compared with the supply of that labor. 

158. Dcmdud for labor. — The demand for the labor 
of each class depends primarily upon the utility, in the 
opinion of the employer, of that class of labor. This 
utility is measured by efficiency, and efficiency is 
measured by profit. INIodern systems of cost keeping 
have been worked out in such detail that it is possible to 
detei-mine with great accuracy that portion of the cost 
of producing a commodity which is to be assigned to 
each class of employes. Careful records are kept of 
labor costs in different de])artments or on different 
jobs. On the basis of these records, judgments are 
formed as to the profitableness of particular mills or 
de])artments. The su])erintendent of a mill who receives 
a high salary is ])aid that salary to get results, and these 
results are measured by the earnings of the mill. He, 
in turn, by his system of cost keeping, is able to deter- 
mine the efficiency of the different departments of the 
mill, which are in charge of foremen. If in a ])articular 
department costs are increasing, the superintendent in- 
forms the foreman of this fact and insists upon an 
explanation. The cause may be found in the ineffi- 
ciency of a certain class of employes, who may either 
do their Mork badly, or may not do it with sufficient 
l)romptness to keep the department ahead of them sup- 
plied with material for work. Here again an investi- 
gation is made, and it may be possible for tlie foreman 
to fix the responsibility for the increasing cost of his 



CAUSES AFFECTING RATE OF WAGES 207 

department upon some one employe whose efficiency has 
fallen below the standard. This employe may be rep- 
rimanded, or his wages may be cut, or he may be dis- 
charged. In the same way, if the profits of the mill 
increase, the manager's salary is raised. If he is a wise 
superintendent, he will advance the wages of his fore- 
men, and they in turn, unless interfered with by 
restrictions imposed by organized labor, will push up 
the earnings of the employes to whose efforts their 
success has been due. 

159. Other causes affecting the demand for labor. — 
The demand for labor depends also, very directly, upon 
the demand for the products of the industry in which 
the labor is employed. When prices are falling and 
business is depressed, the demand for even the most 
skillful and efficient superintendents and foremen is 
greatly reduced. As the saying is, "there is no work 
for them." At such a time, they must either remain 
idle or, if they are retained, their wages are likely to 
be seriously reduced. On the other hand, when bus- 
iness is active and prices are advancing, employers, in 
order to participate in these profits, rapidly increase 
their working forces and all classes of labor share in 
the benefit. 

The demand for labor depends finally upon the 
amount of competition which exists between the em- 
ployers of labor. Every mill is constantly on the look- 
out for good hands. There is a never-ending rivalry 
between establishments to lure away efficient help. 
This competition may be carried on by advertising, 
as when the common labor of the cities of the Middle 
West is attracted to the harvest fields by published 
notice of high wages with board and free transportation, 
and it also becomes effective through the influence of 



ilOH ECONOMICS 

employes who are constantly recommending to the at- 
tention of a foreman some friend or relative employed 
in another mill. 

160. The supply of labor. — The supply of lahor in 
each class consists of the number of laborers in the 
class, and is also influenced by the number of first-rate 
employes in the class below. The supply of unskilled 
labor is recruited from the immigrants. Nearly all tlie 
unskilled labor performed in the Northern States to- 
day, aside from farm labor, is done by Italians and 
Slavs. Without the aid of these new arrivals it would 
be practically impossible to carry on constructions which 
are necessary to the development of our resources. 
This fact is clearly recognized by all large employers 
of labor, and their influence has been sufficient to de- 
feat any of the plans which have frequently been 
brought forward to be enacted into law, whose efl^ect 
would be to seriously restrict the amount of inmiigra- 
tion. 

161. Iminigration. — During the twelve j^ears ending 
1910, the number of immigrants entering the United 
States was 9,555,673. Of the number coming in 1910 
17.1 per cent were from Great Britain and Ireland, 
German}^, Norway, Sweden and Denmark; 24.8 per 
cent from Austria-Hungary; 20.7 per cent from Italy; 
17.9 per cent from the Russian Empire and about 19 
per cent from all other countries. Between 1870 and 
1910 20,541,754 immigrants arrived in the United 
States. Since the working population of the coun- 
try at the present time does not exceed 40,000,000, 
the importance of the foreign element in our sup- 
ply of labor can be appreciated. These immigrants 
are, with few exceptions, desirable additions to our 
population. They are the most energetic of the com- 



CAUSES AFFECTING RATE OF WAGES 209 

munities from which they come. It is a serious matter 
for an ignorant foreigner to immigrate several thousand 
miles to a country with whose language and institutions 
he is entirely unfamiliar. Men who will take these risks 
are usually men whom it is worth while for the United 
States to incorporate into the body of our citizens. 

Although the immigrant usually begins his work as an 
unskilled laborer he rapidly rises into the ranks of 
skilled labor and often displaces, as he rises, the nation- 
ality already in possession of the occupation, most of 
whose members move on into more profitable occupa- 
tions. The French Canadians, for example, displaced 
other nationalities in the cotton mills of New England, 
and they in turn are being hard pressed by the Slav 
and the Italian. The Russian Jew has displaced all 
other nationalities in the ready-made clothing industry, 
and the Italian is rapidly gaining a monopoly of the 
barber's trade. Thus, not only unskilled labor but 
skilled labor is constantly being recruited from the 
ranks of the immigrants. The farm labor of the Unit- 
ed States will in the future, much more than in the 
past, be drawn from the same sources. 

162. Conditions of employment as affecting the sup- 
ply of labor. — The supply of labor is also influenced, 
in like manner as the demand for labor, by the general 
conditions of employment. When business is active it 
is difficult to get sufiflcient number of hands, and enter- 
prises are frequently crippled by lack of labor. This 
was evidenced by the great difficulty experienced by the 
grain and cotton farmers in 1905-1906 in securing 
enough men to harvest their crops, in competition with 
the railroads, which were offering as much as $1.75 per 
day to unskilled laborers. At such a time, moreover, 
in all trades the supply of labor is reduced by reason 

1—14 



210 ECONOMICS 

of the difficulty of enforcing discipline. When a man 
employed on time wages knows that there are a dozen 
employers waiting for him if he loses his joh, he is 
likely to be indifferent as to the admonition of his boss. 
During an industrial depression, on the other hand, the 
supply of labor is abundant. A two-line advertisement 
in the "Help AVanted" column of a daily paper is suf- 
ficient to bring a crowd around the door of a mill the 
following morning. In 1909 an advertising agent in 
Philadelphia inserted a request for an office assistant 
and received on the day following the publication of 
his advertisement 178 inquiries. 

In May, 1909, only one-half of the bituminous coal 
miners of Pennsylvania were employed. In the iron 
and steel industry there was about 80 per cent of nor- 
mal employment, and on the railroads 90 per cent. 
Smaller establishments made even a worse showing. 
The Baldwin Locomotive Works, for example, reported 
13,000 less employes than in 1907, and in the railway 
equipment industry not more than one-fifth of the num- 
ber at work in 1907 were employed in 1909. 

The efficiency of labor is also far greater in dull 
times than during a period of activity. At such a time 
the inefficient hands are laid off, only good men are 
retained and these are spurred to the utmost diligence 
by the fear of losing tlieir positions. 

163. Supply of labor in each class. — The supply of 
labor in each class is influenced by various considera- 
tions. It depends first upon the natural ability and the 
degree of preparation necessary to qualify for the 
service required. In the railway industry, for example, 
we have the president, the traffic manager, the railway 
engineer and tlie section liand, each an employe and 
each representing a separate degree of ability. There 



CAUSES AFFECTING RATE OF WAGES 211 

may be two hundred men in the United States who are 
quaHfied to serve as raih-oad presidents. There are cer- 
tainly five milhon who cai^ serve as section hands. The 
railway president may receive a salary of $50,000 a 
year; the section hand $1.25 a day. The work of the 
railroad president may mean profits of many millions 
of dollars to the company which he serves; it is often 
a question whether a section hand contributes more than 
the amount which he receives. 

164. Qualifications for various positions. — Let us con- 
sider the different qualificafions for these four positions, 
beginning" with the last. All that is required for a good 
section hand is a reasonable amount of energy, ability 
to stand exposure to the weather, and to perform simple 
manual operations, such as spiking a rail to a tie, or 
tamping ballast, or cutting weeds along the right of 
way, or wielding a pick or shovel under the close super- 
vision of a boss. No training or special knowledge is 
required and only a moderate amount of physical 
strength. 

The railwajr engineer receives from $110 to $170 per 
month, and in some cases higher wages extending up 
to $300. To serve as an engineer, a man must have 
had a fair common school education, he must have 
served a term as apprentice in the roundhouse, and as 
fireman on a locomotive ; he must have good vision ; must 
be a man of correct habits, of courage and of unswerv- 
ing fidelity to duty. He must understand not merely 
the running of the locomotive in such a way as to con- 
form to difficult schedules without loss of time ; he must 
also understand the mechanism of the locomotive so 
as to be able to make emergency repairs on the road. 
In short, the engineer must combine in his single person, 
the abilities and the training of the pilot of a ship and 



2ia ECONOMICS 

a lirst class machinist, M'ith the courage of a fireman 
or a poHceman. This combination of quahties is rare, 
and it is not surprising to fii^ that the supply of first 
class engineers, in normal times, falls short of the de- 
mand. A good engineer in charge of a fast freight 
train can save several times the amount of his salary 
over the work of a poor engineer in the speed with 
which he gets his train over the division. 

165. Raihvay traffic manager. — The railway traffic 
manager is a man of a still higher type of efficiency. 
He must be intimately acquainted with the resources and 
industries of a large territory. His knowledge must 
extend to every product produced or consumed within 
that territory, which means that he must be conversant 
with the leading facts of every industry. Unless he 
possesses this knowledge, he will not be able to deter- 
mine with accuracy what rates are required to show the 
largest earnings for his corporation. He must also 
be familiar with the movements of traffic so that he 
can be certain that an adequate car supply will be on 
hand when it is wanted. He must be experienced in 
dealing with men, since he is in constant contact with 
a large number of shippers who are demanding favors 
or proferring complaints. A successful freight traffic 
manager is rare and commands a high salary, $15,000 
to $20,000 a year being not uncommon. Upon the 
result of his work depends the success or failure of his 
company, so that his salary may represent but a small 
fraction of the value of the services which he renders. 

160. The raihvay premdent. — A railway president is 
the highest type of business executive in the United 
States. He is of various types, according to his pre- 
liminary training. Thus the late president Cassatt of 
the Pennsylvania Railroad Company came up through 



CAUSES AFFECTING RATE OF WAGES gl5 

the engineering department; he was a civil engineer, 
and he also thoroughly understood mechanical engineer- 
ing as applied to railroads. President Newman, who 
resigned from the New York Central Railroad Com- 
pany in 1909, came up through the traffic department; 
he served successively the Missouri Pacific, the North- 
western, the Great Northern, the Lake Shore and 
Michigan Southern and finally the New York Central, 
rising from one rank to another to the highest position. 
President Mellen of the New Haven and Hartford is 
known best as an operating official, having come up 
through the operating department of various railroads, 
first, to the presidency of the Northern Pacific and then 
to that of the New Plaven and Hartford. The late 
President Edward H. Harriman of the Union Pacific 
came into the railway service from the financial side; 
he gained great renown by his successful administra- 
tion of the finances of his various companies, and by the 
facility with which he raised exceedingly large amounts 
of money. 

The work of these executives is of incalculable value 
to the companies which they serve. They not only are 
familiar with every detail of the various departments 
through which they have passed but they must also 
thoroughly understand the work of all other depart- 
ments. They are called upon to formulate far-reach- 
ing plans involving an expenditure of many millions 
of dollars for the improvement of the properties placed 
in their charge. They have often, not merely to formu- 
late these plans, but to provide the money necessary 
to carry them out, and supervise the expenditure of this 
money after it has been received. Upon them rests 
the responsibility for the administration of properties 
costing hundreds of millions of dollars. The president 



214. ECONOMICS 

of the Pennsylvania Railroad, for example, has direct 
responsibility for nearly a billion dollars of property 
value. Many railroad bankruptcies are directly trace- 
able to the inefficiency or recklessness of their presidents. 
On the other hand the prosperitj^ of such companies as 
the Union Pacific, the Cxreat Northeruj the Atchison, 
and the Baltimore and Ohio is directly due to the en- 
ergy and wisdom with wliich their affairs have been 
administered. The salary paid to an efficient railway 
pj-esident is trifling in comparison with the value of his 
services. There are, as we have stated, perhaps two 
hundred men who can perform the duties of such a po- 
sition, but there are not more than a dozen railway pres- 
idents in this country who are of the highest type. 



CHAPTER IV 

SYSTEMS OF PAYMENT 

167. Payment of wages according to efficiency. — We 
find this division of employes according to efficiency 
running" through every branch of business. The sup- 
ply of employes in every industry may be likened to 
a pyramid, divided into a number of cross sections. At 
the top there are very few men — the base is composed 
of the bricks and mortar of common humanity. 

There is a growing tendency on the part of the em- 
ploj^ers to base the compensation of their employes 
directly upon their efficiency. To this end various sys- 
tems of wage payment have been devised. The time- 
honored method of paying wages is so much per day, 
per week or per hour. These wages are paid to all 
workers in the same class and have little reference to 
the efficiency of each workman ; they are standard rates. 
Under such a system only the most energetic employe 
will exert himself to do work of superior quality or 
to turn out a larger amount of work than his fellows. 
He does this, moreover, not so much in the hope of 
receiving higher wages in the class in which he works, 
but in order to rise into the class above him- Further- 
more, such men are rare, and the tendency of time 
wages is to reduce every workman to an average in 
both quality and quantity. If he does more than the 
normal amount of work it not only exposes him to the 
jealousy and criticism of his fellows, but imposes an 
extra amount of mental and physical strain upon him 

215 



216 ECONOMICS 

for which he receives no compensation. It has long 
been recognized that if some system could be devised 
Vv'hereby the workman would be paid directlj^ according 
to the amount he produces, the results would be most 
beneficial to the employer. It is tlie object of every 
employer to make as much money as possible. These 
profits are made by producing goods and selling them 
at a profit. The more goods that are produced in a 
given time, if a ready market can be found for them, 
tlie larger will be the profit, and the amount of pro- 
duction depends directly upon the energy with which 
employes drive their work. 

Furthermore, in the expenses of production are large 
sums which must be paid irrespective of the output of 
the mill. The mill has, perhaps, cost $200,000. Six per 
cent interest on this amount is $12,000 per year; depre- 
ciation is $20,000 per year; $1,000 will be paid for 
insurance; an office organization must be kept up; 
salesmen employed and retained in their employment; 
engineers and firemen and watchmen must be kept the 
year round; taxes must be paid. In the aggregate, 
these fixed expenses make up a formidable sum which 
must be added to the amount paid out in wages and 
for raw materials. These fixed expenses are divided 
by the total number of pieces of cloth, or gross of 
brushes which the plant turns out, to ascertain the fixed 
expenses per luiit of product. The larger the output 
of the plant during a given time, the lower will these 
fixed expenses be, and the saving will be so much sub- 
tracted from the cost of the product. This fact con- 
stitutes a strong argument in the mind of tlie manu- 
facturer in favor of basing the compensation paid to* 
cm])loyes u])on their efficiency, in order to induce them 
to turn out the largest possible product. 



SYSTEMS OF PAYMENT 217 

168. Loss of time through idleness. — These consider- 
ations are enforced by the well-known fact that the 
standard of efficiency in any plant where men are paid 
so much per day or per week is low. There is no estab- 
lishment employing 1,000 men in which the actual loss 
of time every day through idling and gossiping, daw- 
dling about work, going on unnecessary errands and 
"killing" time in a great variety of ways, does not 
exceed in the aggregate the time of ten men for ten 
hours each day. A loss of only six minutes a day by 
1,000 men equals 6,000 minutes or 100 hours, the 
amount of time mentioned. Thorough supervision in 
order to prevent this evil of "soldiering" is impossible. 
The worker of to-day, unlike the slave whose aim was 
to accomplish as little as possible, turns out the largest 
product when his interest is so involved that he does 
not receive supervision. The best way to influence him 
to accomplish the best results for his employer is to con- 
vince him that by working in his employer's interest 
he is working in his own interest. Says Mr. Outer- 
bridge : 

Few operatives succeed in obtaining regularly day by day the 
maximum output from any machine ; some have not the requisite 
skill, others fail through lack of attention to small details, 
such as forethought and method in grouping or assembling the 
work, others through laziness or disinclination to turn out more 
than a certain amount of finished material in a day. An oper- 
ative may also, through lack of constant attention to the work, 
unconsciously limit the output of a costly machine and thus 
cause loss to his employer far exceeding the entire amount of his 
wages. ^ 

This loss is a certain one. Suppose that the average 

1 " The Premium System of Wage Payments," Alex. E. Outerbridge, Jr., 
Annals of the American Academy of Political and Social Science, 1903, 



218 ECONOMICS 

wage in the esta])li,sbnieiit mentioned is $2 per clay. 
The full time of ten persons, $20 per day or $6,000 
per year, represents a good return on $100,000 of cap- 
ital. If this loss coukl be saved, the owner of the mill 
would add $100,000 to its vakie. 

109. Systems of wage ijcujmcnt calculated to increase 
efficienci). — Three plans have been advocated to iden- 
tify the interests of the employes with those of the 
employer, and to encourage him to tiu'n out the largest 
})ossible amount of work. These methods are as fol- 
lows: Profit-sharing, piece work and the premium 
system. By the system of profit-sharing a certain per- 
centage of the profits is divided among the employes 
at })eriodical intervals. In some cases they are allowed 
to subsci-i})e to the stock of the C()m[)any on favorable 
terms. Other plans give them an interest in all profits 
over a certain amount; still others di\'ide a fixed per- 
centage on the entire profits of the year. 

Profit-sharing has not proven successful; various 
practical objections having been discovered to it as 
a result of many experiments. In the first place, 
profit-sharing fails to produce the desired results in 
the increased efficiency of the individual employe. 
When the profits of the concern are the joint result 
of several thousand workmen, it is impossible for any 
one man to trace the connection between the bonus 
which he will receive at the end of the year, and the 
increased energy and attention which he may have put 
into his work. Few workmen are able to look ahead 
twelve months or even six months to the results which 
will come to them because of increased effoi-t to-day. 
Employes are also apt to be dissatisfied with the i-esults 
as stated. They believe that the firm is making large 
profits, even when profits have been reduced from causes 



SYSTEMS OF PAYMENT 219 

altogether beyond their comprehension. They are apt, 
therefore, to become dissatisfied, and then the good re- 
sults of the profit-sharing plan fall to the ground. 

170. Profit-sharing unfair to e7nployer. — Moreover, 
the profit-sharing plan is not entirely fair to the em- 
ployer. There are many conditions which affect profit 
and loss in the manufacture of raw material into finished 
products with which the operative has no connection — 
careful buying of material, favorable traffic contracts, 
payment of large sums for inventions that reduce costs 
and of unusually high prices for patented machinery. 
Such causes may add largely to the profits of the con- 
cern. Unless the emploj^e is willing to share in losses 
due to mistakes and blunders of the management or 
to the general industrial situation of the country, it 
is manifestly unfair that he should ask to participate 
in profits in whose making he has had no share. 
Furthermore, aside from these considerations, it is im- 
possible to open the books of a concern to the inspec- 
tion of the employes, nor would they understand the 
method of accounting even if the books were opened. 
For these reasons, profit-sharing, although it is in opera- 
tion in a number of concerns, is not regarded by 
practical business men as a plan which can be recom- 
mended for general adoption. 

Progressive wages have served to increase the laborer's effi- 
ciency, but they have not avoided entirely disputes between 
employers and employees. Profit sharing is a plan for giving 
the laborer an inducement to work efficiently, and for securing 
greater haraiony of interests between employers and workmen. 
Under its provisions' hired laborers are given shares in the 
profits of the business, the share of each workman being de- 
termined beforehand upon some equitable basis. The purpose 
of such an arrangement is to induce laborers to increase their 



220 ECONOMICS 

output, improve its quality, and thus contribute toward the 
creation of extra profits in which thej may share. In some 
instances experiments in profit sharing have had this result, and 
have proved at least moderately successful. But in many cases 
they have proved unsuccessful, and have been given up. A 
common reason for such failure is that there have been very 
small profits to divide, or even no profits at all ; so that laborers 
have had little interest in the scheme, and have not hesitated to 
strike if there was any prospect of immediate advantage re- 
sulting from such a course. 

Experience has shown that profit sharing does not do away 
with strikes, although in some cases it has promoted a better 
understanding and feeling between employer and employed. 
Concerning its merits as a plan for distribution, the following 
points may be noticed. If the share of profits received by 
laborers is created by increased efficiency and exertion on their 
part, then it may be as favorable to efficient production as 
systems of progressive wages, but hardly more so. Unfortun- 
ately, however, the profits actually realized by a business depend 
so much upon good management by the employer that their 
amount may not vary proportionately with the increased zeal and 
efficiency of the workers. Laborers may increase their product 
10 per cent, but bad business management may result in an 
actual loss on the sales. In such a case profit sharing may be 
unjust to the employe. On the other hand, if the profits re- 
ceived by the laborers are merely a gratuity- from the employer, 
then the system is unfair to him. For laborers would be made 
to share in any profits earned by the business, while they would 
bear no share of the losses. In conclusion it may be said that 
profit sharing has accomplished less than its more ardent sup- 
porters have expected.^ 

171. Piece wages. — By the system of piece work, the 
employe is paid according to the amount which he does. 
In a cigar factory with which the writer is famihar, 
the rate for rolling high grade cigars is $20 a thousand. 

1 C J. Bullock, " Iiilroduction to the Study of Econoniics," pp. 186-7. 



SYSTEMS OF PAYMENT 221 

A first class operative in this mill can roll 180 cigars 
a day, which will give him earnings of over $3. A be- 
ginner or an inefficient hand will not roll more than 
fifty or even a smaller number. This system of piece 
work is very largely employed wherever the connection 
of the employe with the product is personal and direct 
and where the attitude of laborers does not make this 
undertaking impossible. 

172. Objections to piece work. — The objections to 
this system, however, are serious. Piece work, from its 
very nature, puts a premium on quantity rather than 
quality. Very careful supervision and inspection of 
the product is, therefore, required if the quality is not 
to deteriorate. Again, the workmen are generally hos- 
tile to the system on account of the practice, which is 
common among employers, of cutting piece rates so 
as to compel the workman to labor much harder to gain 
the same wage than he did under the time system. 
This objection is ahnost inherent in the system. When 
piece wages are established the usual method is to ascer- 
tain how much an employe of average capacity can turn 
out in a day, and to divide this quantity of work into 
the standard wage, giving a rate per piece. As soon 
as the system is introduced, earnings immediately in- 
crease because an increased amount of work is turned out. 
Although this was the object of introducing this system, 
yet the thought immediately comes to the employer that 
his men have been doing less than fair work under the old 
system of time wages. He therefore frequently yields 
to the temptation to reduce their rates, since he is unable 
to see that they are doing more work than they should 
for the wages which he is paying them. 

Furthermore, employers frequently spend large sums 
of money in re-equiping their plants *vith expensive 



222 ECONOMICS 

machinery whicli greatly increases tlie output of the 
mill. They pay for these improvements and they do 
not feel that the workmen whose piece wages are enor- 
mously increased as a result of the improvements, should 
gain all the advantage. The strike in the works of the 
Carnegie Steel Company in 1892 was precipitated by 
an attempt to reduce piece wages which had risen for 
some classes of labor to such an enormous figure that 
certain employes were making more money than the 
average superintendents, a fact due entirely to the intro- 
duction of improved machinery by the company. The 
cutting of piece rates constitutes a formidable objection 
to the system of piece wages and is responsible for the 
imiversal antagonism of labor organizations to this sys- 
tem of wage payment. 

173. The premium system, of xvage imyment. — The 
best method of solving the problem of increasing the la- 
borer's efficiency is by what is known as the premium sys- 
tem, by which the results of the increased efficiency of 
the piece rate system are divided between the employer 
and employe. Under the premium sj^stem, the saving 
which results from the joint effort of the employer in 
the constant improvement in machinery and processes 
and in his attention to various details of works man- 
agement, and the increased diligence of the employe, 
who is paid according to the amount he produces, is 
divided between them. In introducing the premium 
system, the first step is to establish in each branch of the 
business an average standard performance; to ascertain 
by careful observation the amount of work which a man 
of average capacity, working with reasonable diligence, 
can perform in an hour or a day. This is made the 
standard to which every employe is required to conform 
in retin-n for his regular wages, which ai-e fixed at a 



SYSTEMS OF PAYMENT 223 

certain figure for all employes of that class. At the 
same time, he is informed that any saving in the labor 
cost of producing the product on which he is engaged, 
will be divided on a certain agreed basis between him- 
self and the firm. 

The employer, in other words, makes this proposi- 
tion to his workmen: "I will pay you a minimum day 
wage and for that wage you must produce certain min- 
imum nmnber of pieces in order to deserve that wage; 
for each additional piece you add to that minimum you 
will receive so much." For ten pieces, under the pre- 
mium system, a man would be paid $10, or $1 for 
each piece. If he turns out fifteen pieces, instead of 
receiving $15, as under the system of piece wages, 
he may receive $12.50 or $13 as result of his diligence 
in doing more than his allotted task. He thus receives 
a reward and his employer has also shared in the profit 
to which the emplojxr may contribute by the invest- 
ment of his money in facilitating the various operations 
of his plant. 

The following illustration furnished by one of the 
managers of a large foundry and machine shop, shows 
the effect of the piece work system: 

COST OF PRODUCTION PER LATHE PER DAY. 

Ordinary Piece-Work System. Diferential Rate System. 

Man's wages $s?.50 Man's wages $3.50 

Machine cost 3.37 Machine cost 3.37 

Total cost per clay §5.87 Total cost per day $6.87 

Five pieces produced; cost per Ten pieces produced; cost per 
piece 1.17 piece .69 



174. Summary of the advantages of the premium sys- 
tem. — Mr. Outerbridge, in the article already referred 



224 ECONOMICS 

to, illustrates and summarizes the advantages of the 
premium system as follows: 

Reference may be made to a case where new work was intro- 
duced into an estabHshmcnt undertaking an entirely new kind of 
manufacture. The concern had never done the work before, 
so did not know at all what it was going to cost. Parts of 
tlie macliincs were given out to the different departments to be 
made by day's work, because nobody knew what the cost was 
hable to be. The people selected to work by the day were the 
men who were considered the quickest and best workmen in the 
establishment, who would be likely to make those parts under 
the system of day's work as cheaply as they could be made, 
so that the actual cost of making them in this way might be 
made the basis for a piece-work price. Quite a large number of 
tlie parts were made by day's work. I saw some of the work 
being done myself, and did not observe anything that led me to 
believe that there was any loafing on the part of tlie men. A 
piece price was finally fixed based upon the average cost by 
day's work. After the men got more skilled in their jobs they 
did a little better, but the average was taken for the piece-work 
price. It so happened that some precisely similar things were 
made in another estabhshment, and through an accident it was 
ascertained tliat an article which cost about twenty-four dollars 
to make under this system of piece work cost about thirteen dol- 
lars to make in the other establishment where a premium system 
was in vogue. An investigation showed that the actual amount 
of labor required to make the pieces was the same in each foun- 
dry, but in one the simple piece-work system of })ay obtained ; in 
the other a premium system. Then an entire change of personnel 
in the department, including the foreman, was made; new men 
were engaged to do the work on a premium system and the result 
was surprising. In a very short time the new men were making 
nearly double the wages of the former operatives and the cost 
per piece was reduced nearly one-half. 

175. Advantages to employes from introduction of 



SYSTEMS OF PAYMENT 225 

improved machinery. — In the same article Mr. Outer- 
bridge says: 

This system, of course, does not spare the tools, which are 
run at a high rate, and, since its introduction, the views of 
progressive manufacturers regarding the economical use of ma- 
chine tools have materially changed. Formerly old tools were 
venerated and carefully preserved as long as they could be used. 
Now the aim is to obtain the full life-service in the shortest 
possible time, and then to consign the tool to the scrap heap. 
In this way tools are worn out long before they have become 
obsolete in design. "Soldiering" on the part of the operatives is 
effectually eliminated, wages are raised, the output increased 
and cost of production is decreased in an amazing ratio. All 
this is accomplished without exhausting toil on the part of the 
operative, for the machine has relieved him of most of the hard 
work. Especially is this noticeable in handling heavy materials. 
In former da3^s rupture was very common indeed among molders 
in foundries, cauged by frequent severe straining in lifting flasks 
and molds ; now it is a rare thing to find rupture among the 
younger molders, owing to the fact that in all modern foundries 
traveling cranes and other hoisting appliances are provided for 
lifting heavy materials and carrying them from one place to 
another. 

Within my own experience there has been a great improvement 
in this respect. I can recollect at least six molders in one 
foundry who were badly ruptured from lifting their molds, 
while to-day I never hear of this trouble, for the main cause has 
been removed. The mechanic of to-day, who is engaged in rivet- 
ing a boiler or a bridge structure, no longer spends ten hours 
a day in striking blows with monotonous regularity upon the 
rivet heads, but he is employed to control the steam or hydraulic 
riveting machine, a sort of giant hand, which presses the red-hot 
rivet into place with a simple silent squeeze of its powerful finger 
far more effectually than can be done by two strong men striking 
one hundred blows each with a riveter's hammer. This has been 

proved by official tests. 
1—15 



226 ECONOMICS 

170. Hazards of different occupations. — The supply 
of labor is influenced by the dangers and risks incident 
to the occupation. This influence operates in two ways. 
In the fii'st place the supply of men whose character 
and training (qualifies them to engage in a hazardous 
occupation is limited in such callings as that of the loco- 
motive engineer, the structural iron worker, and the city 
fireman, which require a degree of courage and steadiness 
of nerve possessed by very few men. Then there are a 
number of occupations so unhealthful and even deadly 
that special inducements must be offered to secure an 
adecjuate supply of labor. The worker in these occu- 
pations requires no unusual moral or physical quality, 
but wiien he enters them he risks his life, either because 
of the vmusual risk of serious accident, against which 
he cannot guard himself, or because of the naturally 
imhealthful conth'tions surrounding the occupation. 

Coal mining is one of the hazardous occupations. It 
is, at best, a dangerous employment. AVater drips upon 
the mine worker from the roof and oozes around his 
feet. There is constant danger in electrically equip})ed 
mines from live wires which run only a few inches abo\'e 
the heads of the miners. Eiven with perfect ventilation, 
which is rarely found, the air is frequently foul ^\'ith 
powder fumes, and the pitch darkness is barely pierced 
by the feeble gleams of the mine lamps. The mine 
worker's toil is, moreover, enlivened by the constant 
danger of falls of slate, against which at times no cau- 
tion can protect, while the danger of explosion, es- 
pecially in bituminous coal mines, is always present. 
JMuch of the work is itself excessively severe ; that of 
loading cars with coal and handling heavy pieces of 
slate being es])ecially arduous. Coal mining is at best 
an unhealthy, exhausting, excessively disagreeable and 



SYSTEMS OF PAYMENT 227 

supremely dangerous occupation. The mine worker 
carries his Hfe in his hands. Measured by the perils 
and hardships of his calling he is entitled to the highest 
wages and the most liberal treatment, neither of which, 
at least until recent years, has been accorded him. 

Largely as a result of the hardships and dangers of 
the coal mining industry and also because of the fact 
that the mine worker, when thoroughly organized, is not 
amenable to discipline, the supply of labor, even at 
mines which pay high wages, is very irregular. Steady 
work in the mine is too severe for a man of average 
physique and it is difficult during periods of active de- _ 
mand for the companies to secure sufficient labor to 
supply their customers. 

177. Illustration from manufacture of bleaching 
powder. — Another illustration of dangerous occupa- 
tions is given in Wood's "Primer of Political Econ- 
omy," in a description of the method of making bleach- 
ing powder: 

In another part of the works are men laboring before great 
furnaces. Each has a large bunch of oakum in his mouth to 
keep him from inhaling the poisonous gas escaping from the 
salt cakes, which he is turning and drawing from the glaring, 
heated aperture. With two towels he manages to wipe the per- 
spiration from his face, one towel being in use while the other 
is drying, and there he works in the heat for eight hours with 
scarcely a minute to snatch a bite of food. The work of the 
salt-cake men consists of baking common salt and treating it 
with vitriol to make muriatic acid, such as tinsmiths use in solder- 
ing. They can be recognized anywhere by the effect of the 
poisonous gases they are compelled to breathe, which not only 
destroy the lungs, but attack the teeth, causing them to decay 
rapidly and fall out. A salt-cake man has no teeth, or per- 
haps a few blackened stumps remain, and as he is unable to chew 
his food, indigestion a,s well as diseased lungs adds to his af- 



m% ECONOMICS 

flictions. The effect of this work is noticeable in less than a 
year. 

In another building are men shoveling slacked lime, turning 
it over and over until it is finally loaded into the lifts that 
convey it to a chamber where it is treated with chlorine. The 
white particles of lime are in the air all about them, and here 
again each has a big bunch of oakum in his mouth to prevent 
him inhaling the irritating arid burning dust. At this they can 
work only twenty minutes at a time, with short intervals of 
rest, for a shift of seven hours. After the day's work they wash 
themselves with oil or tallow, for the application of water to 
their faces or hands, with every pore filled with lime, would cause 
.terrible, if not fatal burning. At this work there is a tendency 
to many diseases always associated with the handling of lime, 
and blindness from the alkaline burning is not uncommon. 

On each side of a long corridor are small sheds which seem 
like infirmaries for the victims of the deadly gases and the 
corrosive acids and dusts of the works. In these sheds are the 
half-blind victims of lime-shoveling, the asthmatic and decrepit 
packers, the toothless salt-cake men and the used-up vat men, 
barrow men, and general workers. There they sit day after 
day, breaking the stone from which sulphur is to be extracted, 
and the click of their hammers has won for them the jocular 
name of the hand-bell ringers. This is the last occupation about 
the works, and as the men weaken at it they are removed to the 
workhouse, their places being filled by others unfit for the more 
arduous occupations. These men are not old, for the work is 
such that they seldom or never live to an advanced age. Every 
branch of the work is dangerous and destructive.^ 

The wages paid in such occupations are very high, 
but even the highest wage for such work is entirely 
inadequate remuneration for the nearly inevitable sac- 
rifice of life and strength which a few years of such 
employment involves. 

1 " A Primer of Political Economy," S. T. Wood, p. 23. 



J5YSTEMS OF PAYMENT ^29 

178. Supply of labor depends on chances of success. 
—The supply of labor in diiFerent occupations is much 
influenced by the chances of success. Largely because 
some lawyers, physicians and engineers make from 
$100,000 to $500,000 a year, the lower ranks of these 
professions are crowded with men, most of whom are 
unfitted for their work and will never make more than 
a bare living, but are buoyed up until the age of ac- 
complishment is passed by the hope of success. The 
sight of the glittering prizes which a few successful 
men achieve is in part responsible for overcrowding 
the professions. The same influence is responsible for 
the oversupply of clerks in banks and brokerage houses. 
There are thousands of young men working in the 
financial districts for less than a comfortable subsistence, 
or even skimping themselves of all but the bare necessi- 
ties in order to hold a routine position in some banking 
or brokerage house, from which they believe that, as 
a few men have done, they may rise to great wealth. 

Social esteem and a dignified position in the com- 
munity influence the supply of labor in difl'erent occu- 
pations. This is very well illustrated by the attitude 
of factory communities toward different classes of 
working girls. Stenographers and clerks, although 
they may be paid much lower wages than mill hands, 
stand on a higher social plane. In the same way 
young men, when they can wear white shirts at their 
work, and keep their shoes nicely polished and their 
clothes in good condition, find solace and compen- 
sation for the fact that a good mechanic will usually 
make higher wages than they receive. Other illustra- 
tions of the same principle are furnished by the over- 
crowding of the teaching and ministerial professions. 
Those who elect these callings must take their compen- 



230 ECONOMICS 

satioii very largely in dignity and social esteem. They 
find quite often with advancing years that it would have 
been wiser for them to have substituted cash for this 
peculiarly unsubstantial variety of credit. 

The chances of advancement influence the supply of 
labor; many graduates of technical schools, for ex- 
ample, are willing to serve in subordinate positions in 
shops and mills in order to supplement their theoretical 
knowledge by practical experience. They use these 
subordinate positions as stepping-stones to higher posi- 
tions, and so increase the supply of labor in these lower 
grades. The ranks of labor in all positions preparatory 
to better paid work are apt to be overcrowded from the 
same cause, and the wages paid in such occupations 
are therefore lower than if they w^ere not looked upon 
as stepping-stones to higher positions. 

179. Sole or imrtial dependence of labor on wages 
received. — The supply of labor is largely influenced by 
the sole or partial dependence of the laborers upon the 
wages received. The importance of this influence is 
illustrated by the low wages paid to women. The ma- 
joritjr of women in industry are unmarried and living 
at liome. They are not, as a rule, entirely dependent 
upon their earnings for support and are, therefore, 
willing to work for lower wages than they would other- 
wise demand. This fact is responsible for the system 
which prevails in the clothing trades known as the 
"sweating" system, where most of the work is done in 
the homes and is passed through various grades of sub- 
contractors. Each one of these "sweaters" is working 
on a narrow margin of profit and 'is compelled to take 
every advantage of the worker who is usually required 
to call liis entire family to his assistance before he can 
make decent wages. Women's wages are also in- 



SYSTEIMS OF PAYMENT 231 

fluenced in many cases, it is claimed, by their relative 
inefficiency, which is due to their lack of permanent in- 
terest in their work. Most unmarried women expect 
or, at any rate, hope to marry. On this account, they 
do not devote themselves to any calling- with the same 
zeal and energy as they would if they expected it to be 
their life work. 

This is well illustrated by the teaching profession. 
From time to time, there has been an agitation in favor 
of paying the same wages to women teachers as to the 
small number of men who can be attracted into this 
most important of all the professions. These attempts 
have generally been unsuccessful, however, and the 
main reason given for refusing equal payment to 
women teachers is that high salaries are wasted on them. 
The community, it is claimed, does not receive a return 
in their increasing efficiency, since their places have con- 
stantly to be filled by new recruits. A recent writer on 
the subject proposes as a solution of the problem a 
frank recognition of the fact that a woman should not be 
retained in teaching beyond the age of thirty years, and 
that up to that point she should be paid unusually high 
wages in order to attract talent and stimulate interest. 



CHAPTER V 

LABOR ORGANIZATIONS 

180. The trade union and the supply of labor. — The 
most important influence upon the supply of skilled 
labor is the trade union. These are voluntary unin- 
corporated associations which have been formed in 
almost every trade by workmen who desire to improve 
their position in bargaining with their employers. The 
justification of labor organizations is fundamentally the 
inequality in bargaining ability between employer and 
employe. The employer has on his side all the ad- 
vantages of wealth, position and training. The em- 
ploye is poor, usually living from hand to mouth; he is 
ignorant, and his bargaining ability is small. If we 
assume that in making such an important bargain as the 
wage contract involves, there should be an equality of 
capacity between two parties, we must approve the 
organization of workmen so that they can deal with 
their employer, not as single men, but as an organized 
body whose representatives can meet and treat with the 
employer on an equal footing. 

Trade unions are of two kinds, but of substantially 
the same form of organization. The first is where men 
following a particular trade form themselves into a 
union, for example, bricklayers, carpenters, steam-fit- 
ters or stationary engineers; the second are known as 
industrial unions and include all occupations in a par- 
ticular industry. Illustrations of industrial unions are 
the Garment Workers of America, the United Mine 

232 



LABOR ORGANIZATIONS 233 

Workers of America, the Amalgamated Association of 
Iron, Steel and Tin Workers. 

181. Form of organisation of union. — The following 
description of the condition of the United Mine Work- 
ers of America by Dr. Frank J. Warne, in his book 
"The Coal Mine Workers," will apply, with minor 
changes, to all of the large unions: 

In many of its features the general scheme of organization of 
the United Mine Workers of America bears a close resemblance 
to that of our pohtical organization. It is made up of national, 
district (state), sub-district, and local unions. The national 
union, of which there is but one, is designed to have jurisdiction 
over all the coal mine workers of the United States, although 
recently it has also been extended into British Columbia. In 
consequence of this inclusion of the miners of the Dominion, the 
1906 Convention amended the organization's constitution by 
substituting the term international for national. There are S3 
distinct unions, approximately 35 sub-district unions, and about 
^,700 local unions. 

Subject to the constitution of the national union and the 
legislation of the national convention, the district union, as a 
general statement, has jurisdiction over a particular state. This 
is due largely to the convenience of state-line divisions. There 
are exceptions, however. In Pennsylvania, for example, owing 
to the usual importance of the coal producing area of that 
state, there are six districts — Numbers 1, 7 and 9, covering the 
anthracite region; District 2, in the Clearfield or central soft- 
coal field ; District 5, in the Pittsburgh or western bituminous 
coal field; and District 16, which also includes Maryland. In 
Indiana, District 8 covers the block-coal field, and District 11 
the bituminous coal territory of that state. In a few cases one 
district extends over more than one state — District 15 takes in 
Utah, Colorado and New Mexico ; District 17 includes Virginia 
as well as West Virginia; District 21 takes in Arkansas, 
Oklahoma and Texas; and District 22 covers both Montana 
and Wyoming. 



234 ECONOMICS 

Under the constitution and legislation of the district union 
are sub-district and local unions. The sub-district union has 
been made a feature of the organisation in order that special 
regulation may be secured in particular cases for varying con- 
ditions, which prevail in almost every state, without placing the 
whole district in jeopardy when only small areas are affected. 
The local union is the unit making up the sub-district, district 
and national unions, and naturally is the smallest in member- 
ship of the four unions. One local union usually has jurisdic- 
tion over the mine workers at a particular colliery or mine. It 
must have at least ten members. 

Over all the unions the constitution and legislation of the 
national union are supreme. In those states where a joint con- 
ference between representatives of operators and mine workers 
has been established, the provisions of its agreement take prece- 
dence over the constitution and by-laws of the district, sub- 
district, and local unions, and are second only to the legislation 
of the national convention. Outside these joint agreements and 
the constitution and legislation of the national union, the district 
exercises authority and governing surveillance over the sub-dis- 
tricts and locals. Each union, however, has its own constitu- 
tion and by-laws, its own officers and conventions, and legislates 
for its own particular area and group within the authority 
granted to it. 

182. The United Mine Workers of America. — Dr. 
Warne writes further of this organization as follows: 

The United ]\Iine Workers of America is one of the most demo- 
cratic, with the possibility of at once becoming one of the 
most autocratic, of any organization in the world. It is demo- 
cratic in the sense that in the final analysis its policy and man- 
agement are in the hands of its members. All power vests with 
them in their collective capacity. To them, in their local unions, 
every great question affecting the national, district, and sub- 
district unions is referred sooner or later; from the local unions 
— ^from the active, every-day workers in the coal mines — come 



LABOR ORGANIZATIONS 235 

the final decisions on all such questions. They nominate and 
elect, by direct vote of the members, the president, vice-president, 
and secretary-treasurer ; they indirectly, through their par- 
ticular districts, elect the members of the national executive 
board ; they choose the delegates that make up the national Con- 
vention ; they send instructions to this convention upon most of 
the recommendations made to that body by the president of the 
national union; they instruct their delegates how they are tO' 
vote ; they not only choose the national and their own local offi- 
cers, but through regularly elected delegates they compose the 
sub-districts and districts, and through these determine the policy 
that is to be adopted in any particular instance. 

183. The national convention. — The same writer thus 
describes the annual convention held by this union : 

Once a year representatives of the local unions meet in regu- 
lar convention as the national union, usually at Indianapolis, 
beginning the third week in January, and for ten days or two 
weeks, outline the policy of the national union for the ensuing 
year. This convention possesses absolute power ; there is noth- 
ing affecting the organization it cannot do, even to altering or 
amending its fundamental law — the constitution. It can even 
abrogate, if it so chooses, the agreement of the interstate joint 
conference. Its delegates are elected directly by the local 
unions on the basis of one vote in the convention for each one 
hundred members (or less), and an additional vote for each one 
hundred members or majority fraction thereof. No representa- 
tive, however, can cast more than five votes on any question. In 
the 1905 convention, there was a total of 1,057 locals represented 
by the delegates who cast 1,877 votes. The representative must 
be "a miner or mine worker or employed by the organization" 
and a member in good standing of a local union in the district 
he represents (Section 2, Article V, of the constitution). The 
constitution of the national union interprets the term "miner 
or mine worker" as meaning "any one working in or around the 
mines and a member of a local union." Any member of tTie 
United Mine Workers occupying a position other than that of 



236 ECONOMICS 

miner or mine worker, excepting those holding positions with 
the organization or with any other affiHated union, is inehgible 
as representative to any sub-district, district, or national conven- 
tion, nor can such member represent the United Mine Workers 
in a central body or state Federation of labor convention. The 
object of this constitutional provision is to safeguard the unions 
from possible domination by men under the influence of their 
employers. Special conventions, the delegates to which must 
possess the above qualifications, are provided for by the consti- 
tution. The purpose of the national convention is to legislate 
on any question pertaining to the objects of the organization.^ 

184. Objects of the trade union. — The objects of the 
United Mine Workers organization is stated as follows 
in the preamble to the constitution: 

"There is no fact more generally known, or more widely be- 
lieved," says this preamble, "than that without coal there would 
not have been any such grand achievements, privileges and 
blessings as those which characterize the twentieth century civil- 
ization, and believing as we do, that those whose lot it is to daily 
toil in the recesses of the earth, mining and putting out this coal 
which makes these blessings possible, are entitled to a fair and 
equitable share of the same ; therefore, we have formed 'The 
United Mine Workers of America' for the purpose of the more 
readily securing the objects sought by educating all mine work- 
ers in America to realize the necessity of unity of action and pur- 
pose, in demanding and securing by lawful means the just fruits 
of our toil." 

Under this general purpose are included shortening of 
tlie liours of labor, raising of wages, the securing of 
legislation favorable to the interests of the workingmen 
and the general improvement of the social and economic 
conditions of their members. 

185. The trade agreement. — Whenever possible the 

1 Frank J. Warne, "The Coal Mine Workers, p. 2. 



LABOR ORGANIZATIONS 237 

union endeavors to make wage contracts for all of its 
members covering terms and conditions of employment 
for a given period. An illustration of such an agree- 
ment is contained in the following provisions as to the 
payment for coal mining in the agreement between the 
United Mine Workers and the bituminous operators 
signed at Indianapolis, April 1, 1904: 

That the interstate agreement of the present year shall be con- 
tinued with the same conditions for two years from April 1, 
1904, until March 31, 1906. with the following exceptions, to 
wit: 

First. That the price for mining be reduced five ( 5 ) cents per 
ton on inch-and-a-quarter (1^) screened lump coal, pick- 
mining, in western Pennsylvania thin vein, the Hocking, the bas- 
ing district of Ohio, and in both block and bituminous districts 
of Indiana; three (3) cents per ton on mine-run coal, pick-min- 
ing in the bituminous district of Indiana, and at Danville, the 
basing point of Illinois. 

Second. That the price for machine-mining be reduced four 
(4) cents per ton on screened lump coal in western Pennsylva- 
nia thin vein, and the Hocking, the basing district of Ohio ; 
five (5) cents per ton on screened lump coal in the block and 
bituminous district of Indiana, and three (3) cents per ton on 
mine-run coal in the bituminous district of Indiana, and at Dan- 
ville, the basing point of Illinois. 

Third. That the inside day-wage scale shall be as follows, 
with the conditions of the Columbus day-wage scale agreement 
of 1898, to wit : 

Tracklayers $2,42 

Tracklayers' helpers 2.23 

Trappers l-OSi/s 

Bottom cagers 2.42 

Drivers 2.42 

Trip riders 2.42 

Water haulers and machine haulers 2.42 

Timbermen (where such are employed) 2.42 



^38 ECONOMICS 

Pipemen, for compressed-air plants $3.36 

Company men in long-wall mines of third vein 

district, northern Illinois 2.23 

All other inside day labor 2.23 

Fourth. That yardage and dead-work be reduced in the same 
proportion. 

Fifth. Tliat internal differences in any of tlie states or dis- 
tricts, both as to prices and conditions, shall })c rcfi'rrcd to the 
states or districts affected for adjustment. 

Further, in pursuance of the authority vested in us, we 
hereby call a joint convention of the coal operators and min- 
ers of western Pennsj^lvania, Ohio, Indiana, and Illinois, to meet 
at Indianapolis, Indiana, at 10 o'clock a. m., January 25, 1906. 

In addition this contract settled the "basing point," 
in each state concerned, for work about the mines ; fixed 
upon 2,000 pounds as a ton for the entire central 
competitive fields included in the agreement; recognized 
the two general methods of fixing rates upon a screened 
coal of mine-run l)asis; agreed upon regulation screens 
where the screen method is in use; established a differ- 
ential between machine and pick-mining under which- 
ever method employed, between punching and chain- 
macliine mining, between thick and thin-vein pick 
mining; and made eight hours a day's work for all 
classes of mine employes. This agreement settled for 
a time almost every important question which could arise 
between employer and employe in the soft coal in- 
dustry. 

These agreements are generally observed with 
fidelity on both sides. The employers are responsible 
persons and can be held to their agreements by process 
of law. The unincorporated labor union has been 
criticised because it is not responsible, but in several 
very noteworthy instances, notably during the anthracite 



LABOR ORGANIZATIONS 239 

strike of 1902, organized labor has refused, even under 
})ressure of apparent necessity, to abide by the letter of 
their agreement. Minor violations of agreements are 
constantly occurring on both sides, but in general they 
are faithfully observed, and are most satisfactory to 
both sides. EfSpecially do employers favor the method 
of collective bargaining because it enables them to go 
ahead with their calculations on the basis of a fixed 
labor cost which thej^ know will not be disturbed during 
the life of the contract. 

186. Contests between employer and einploye. — In 
only a limited number of cases, however, are these 
wage agreements made. Generally speaking, there is 
a certain amount of conflict and contest between em- 
ployer and employe on a variety of matters. A labor 
organization, no matter whether a collective bargain is 
made or not, is active in behalf of its members. Its 
local representatives circulate through the shops where 
the members are employed, and hear any complaints 
which they may have to make of ill treatment or in- 
justice at the hands of foremen or employers. If, for 
example, a man is discharged, and does not consider 
that he has been at fault, he appeals to the shop com- 
mittee, who take up his grievance with the superin- 
tendent and endeavor to secure his reinstatement. The 
shop committee also investigate wage conditions, and 
if they consider that members have a legitimate 
grievance, they will endeavor to secure its correction. 
The union is also represented in these negotiations with 
employers by walking delegates, who are district super- 
intendents, visiting a number of shops and mills and 
conferring with the local representatives. 

If an agreement on any matter of dispute is not 
reached after conference with the employer, the matter 



UO ECONOMICS 

may be taken up by the various governing boards of 
the union, each one in turn endeavoring to reach a 
basis of settlement. When it reaches the district board 
or the national board, according to the importance of 
the case and the constitution of the union, an ultimatum 
is issued to the offending employer and he is threatened 
with a strike. 

1£7. The strike. — The strike is one of the most 
familiar of American industrial phenomena. It is 
simply the refusal of a number of workingmen, usually 
organized, to sell their labor for less than a stipulated 
price, or to work under other than specified employment, 
coupled with the refusal of the pin-chasers of the labor 
— the employer — to accede to the demand. A peaceful 
and sane method is the method of collective bargaining, 
which has already been described. This may be likened 
to arbitration in the settlement of international disputes. 
On the other hand, just as in differences between 
nations, when negotiations fail, we have war. The 
strike is a condition of industrial warfare. 

The following description of the strike by Dr. Warne 
gives a fair and accurate representation of the working 
of industrial warfare from the standpoint of a disinter- 
ested observer. 

Realizing that the primary object of a trade union in 
inaugurating a strike is to secure a specified wage and well- 
defined conditions of employment, its first object is to control the 
law of competition in that particular industry so that labor 
cannot be sold there for less than the wages asked or under 
other than the specified conditions of employment. To do 
this the employes in that industry must first be persuaded to 
refuse to sell their labor except upon the union's terms. This 
is secured from some by their becoming members of the union 



LABOR ORGANIZATIONS 241 

and abiding bj its rules and regulations, and this is accom- 
plished usually through the organizers — the "agitators" or 
"walking delegates" as some would have them called. It is safe 
to say that no strike can be inaugurated with any prospect of 
its success unless a considerable number of the employes are 
bound together in a community of interest to support actively 
the demands of the union. These men form the nucleus of the 
Trade Union and are a powerful entering-wedge in persuading 
others who sell their labor in the same market, to raise its price 
or to refuse to lower the price, as the case may be. This is done 
by creating a public sentiment among the group of workers and 
in the particular community through mass meetings, addresses 
and proclamations of the leaders, by boycotting, picketing, 
ostracism, marches, and in innumerable other ways devised as 
occasion may arise. 

188. Picketing in strikes.- — In controlling the ordinary supply 
of labor in the industry, committees of union men visit personally 
every man employed who has not already been captured by the or- 
ganizers, and his position is definitely ascertained. This is one 
of the most important uses of picketing, by means of which men 
are met on their way to and from work, the pickets being located 
at their homes, around the collieries, and along the highway, or 
wherever there is the possibility of meeting men who continue 
at work. So severe was the picketing in the strike of 190S 
in the anthracite fields that many of the mining companies sur- 
rounded their collieries with high board fences, having strands 
of barbed wire strung along the top. Guards at the entrances 
prevented access to the men at work, who remained inside the 
grounds day and night. In fact, some collieries became regular 
stockades. With the employes continuing at work the pickets 
at first have recourse to the powers of friendly and peaceable 
persuasion, but if these fail to induce the men to join the 
'union, or, if not this, at least to remain away from work, then 
upon the non-union men are brought to bear social forces 
verging upon lawlessness, and overstepping the safeguards 
the state has thrown around individual liberty, which only a 

1—16 



242 ECONOMICS 

strong public sympathy with the cause of the union will support. 
The more important of these social forces are ostracism and 
boj'cotting, with their accompanying manifestations. 

189. Ostracism. — Ostracism is a stronger social force in main- 
taining a high standard of personal conduct than most of us real- 
ize. It means banishment or exclusion from social intercourse or 
favor, and is usually employed by a particular group against 
members of its own class or craft. Its most effective weapon 
is some term of reproach coined for the purpose. Lawyers, 
for example, who do not come up to the standard set for that 
profession by its dominant group, are ostracised and termed 
"shysters." So it is with the medical profession, physicians en- 
gaged in questionable practices which the dominant group de- 
nounce are ostracised bj' the more reputable practitioners with 
tile reproachful term "quack." The same social force is at 
work among the industrial classes. Union fnen set a standard 
as to wages and conditions of employment in a })articular indus- 
try, and those workingmcn who fall below that measurement in 
offering their labor for a less price, are ostracised and denounced 
as "scabs." Whether the group be doctors or lawyers or work- 
ingmen, whatever it adopts as the standard of measuring con- 
duct along particular lines is sooner or later taken up by the 
l)roadcr social grouping in the community and accepted as its 
standard of judgment. This is particularly and strikingly true 
of a community closely identified with an industr}^ the liveli- 
hood of whose members depends upon the industry's activities, 
and in which a dominant group (usually members of a trade 
union) creates the industrial standard. This explains the atti- 
tude of hostilit}^ an industrial community exercises towards the 
"scab." It explains, also, perhaps, how men far removed from 
the influence of the working classes can look upon the "scab" as 
"a hero." 

190. Illustrations of ostracism. — The social force of ostra- 
cism, put into operation by the working of the trade union, is di- 
rected, ;iml ])avticularly so in strike times, not only against tlie 
"scab" himself, but also along all those cliannels of social rela- 
tions affecting him and which might have influence upon him in 



LABOR ORGANIZATIONS 243 

bringing about action conformable to the standard of the domi- 
nant group. The strength of this weapon in the strike of the 
anthracite mine employes in 1902 caused union men and their 
families to refuse to associate with the workingman who con- 
tinued his employment in the mines ; it expelled a prominent and 
otherwise highly-respected citizen from a benevolent society 
which had for its object the assisting of sick members and the 
defraying of a part of the funeral expenses of those who died, 
and of which he had been a member in good standing for more 
than twenty-seven years ; it forced a member of a temperance so- 
ciety who had been faithful and active for twelve years to 
resign ; it caused children of striking mine workers not only to 
refuse to attend the school of a woman teacher whose aged 
father was a watchman at one of the mines, but they also de- 
manded that she be discharged. Children of union miners would 
not attend Sunday school with their former playmates whose 
relatives continued at work ; members of the Lacemakers' Union 
employed at a silk-mill refused to work alongside girls whose 
fathers and brothers would not strike ; clerks were dismissed from 
stores and business establishments because they were related to 
men who continued at work in the mines ; congregations in more 
than one religious denomination were split into factions by 
union members refusing to worship alongside non-union mine 
workers ; even promises of marriage were broken through rela- 
tives of one or the other contracting parties being non-union 
workers. 

The "scab" was not infrequently held up to public scorn and 
ridicule by the publication of his name in the "unfair list" 
of the newspapers in the mining towns as being "unfit to asso- 
ciate with honorable men" ; he was represented by name on 
signs attached to effigies dangling from electric-light, telegraph, 
and telephone poles and wires and from trees In front of his 
home and along the highways and streets ; a grave in his yard 
with his name placed upon the board at the head to represent a 
tombstone not infrequently confronted him ; the sign of "the 
skull and eross-bones" was painted on his house, and in innu- 
merable other ways, conceivable only by workingmen whose 



244 ECONOMICS 

imaginative faculties have been aroused by the desire for perse- 
cution of others who oppose a cause which is so vital to their 
home and family, was created a public sentiment against the non- 
union employe.^ 

191. The strike an effective weapon. — The strike is 
the only weapon which the union has to enforce its de- 
mands, but it is a very powerful weapon. It may be 
confined to a single shop, or, in case the executive offi- 
cers deem it necessary, the strike may be extended 
throughout the entire industry, thus involving employers 
who have no connection with the dispute which brought 
on the strike. Most of the unions collect from the dues 
of their members "defense funds" out of which the needy 
among the families of strikers are supported. During 
the anthracite coal miners' strikes of 1900 and 1902, 
the bituminous coal miners kept at work and their earn- 
ings were largely increased by reason of the decreased 
supply of anthracite coal, for which bituminous coal 
had to be substituted. Out of these increased earnings 
they made large contributions to the support of their 
members in the anthracite region. When the strikers 
succeed in winning the support of public opinion, as in 
the cases just mentioned, they have secured large sums 
by public subscription. 

192. Situation of tlie employer under competition. — 
The success of the strike depends very largely on the 
situation of the employer and especially on his relation 
to other employers in the same industry. The writer 
has elsewhere stated the employer's situation in dis- 
cussing the advantages of combinations among employ- 
ers in dealing with labor as follows: 

"One final advantage secured by combination deserves 
special notice. This is the improved position of the 

1 Frank J. Warne, " The Coal Mine Workers." 



LABOR ORGANIZATIONS U6 

manufacturer in dealing with labor. From the man- 
ufacturer's standpoint the insistent demand of organized 
labor for high wages and short hours is equivalent to 
a demand that the manufacturer should submit to a 
reduction of this profit. These demands his business 
training teaches him to resist. Under the system of 
competition, however, in resisting the demands of his 
employes, he is placed at a serious disadvantage. For 
these employes are organized into great unions contain- 
ing 20,000, 40,000, 90,000 or even 250,000 men, under 
the control of a single executive board, which secures 
a united action of the entire membership of the union 
upon any matter of common interest. Competition in 
the field of skilled labor has been largely eliminated, 
and well-organized combination has long since taken 
its place. These contests between employer and em- 
ployes are unequal. The manufacturer has pressing 
obligations to meet by the sale of his product; in order 
to meet these obligations, he must fill his contracts and 
hold his customers. His financial position is not 
strong enough to permit a long continued suspension 
of his plant. He is hard pressed by competitors who 
are doing their utmost to persuade his customers away 
from him. He stands alone, struggling for business 
with concerns whose hands are against him, as his hands 
are against all his rivals. 

193. Strong position of the union in negotiating with 
competitors. — "To the manufacturer in this situation 
comes an ofiicial of the International Association of 
Machinists, or of the Amalgamated Association of Iron 
and Steel Workers, or the Iron Moulders' Union of 
America, with a peremptory demand for a reduction of 
hours, or an increase in wages, or the admission of walk- 
ing delegates to the shop, or the limitation of the number 



246 ECONOMICS 

of apprentices, or tlie discharge of all non-union men. 
All or any number of these demands may be made upon 
the manufacturer; if he refuses a strike is the alternative. 
His men will walk out at a word from their general 
officers, and there will be none to take their places. 

"The business instincts of the manufacturer lead him 
to refuse an advance in wages as he would resist an 
increase in the appraisal of his plant for purpose of 
taxation. He may feel that his men are receiving high 
wages — i:)erhaps the proposition is to raise them from- 
$3.50 to $4 per day. He looks upon the proposed re- 
duction in hours as equivalent to a reduction of output, 
opposed not merely to his own interests, but to those 
of his employes. A demand that outsiders should dic- 
tate the management of his business he regards as 
effrontery. His judgment is unalterably opposed to 
granting the demands of the union. 

"Each one of his competitors may feel the same way. 
In the absence of competition, they would unanimously 
refuse to make the concessions demanded. They would 
even welcome a strike as offering an o])portunity to 
break the power of the union. They would concentrate 
their efforts on the plants in which the union was weak- 
est, sending thither all non-union men that could be 
secured, filling as many orders as possible from these 
plants, and appealing to the sympathy of their cus- 
tomers to induce them to be patient with the delay 
involved in breaking the strike. They would collect a 
large defense fimd, scoin* tlie country for non-union 
men, educate unskilled labor into a knowledge of ma- 
chines and ])]'ocesses, secui'c the assistance of the courts 
in ])rotecting non-union men from interference, and, by 
gradually increasing their workiiig force, they would 
reopen first one mill and then another. Finally the 



LABOR ORGANIZATIONS 247 

reserve funds of the strikers would be exhausted, their 
courage weakened by such determined resistance, their 
confidence in their leaders impaired, and the solid wall 
of their resistance honeycombed with disaffection, until, 
first singly, and then by hundreds, the strikers would be 
clamoring for reinstatement on the old terms, the union 
officials compelled to surrender to save their organiza- 
tion, would concede their defeat and make an abject 
surrender. Such would be the usual result of general 
strikes were unanimous action among employers to be 
secured. 

194. Common action among employers impossible 
under competition. — "Under competition, however, such 
unanimous action is next to impossible to attain. Few 
employers feel safe in standing out against the union, 
and thus precipitating a strike, for fear lest some of their 
competitors should grant the demands, keep their mills 
running, and get the orders which the strike prevented 
them from executing or accepting, and in the profits 
from which, these competitors might find ample com- 
pensation for the concessions in wages and hours which 
had been made to secure this increased business from 
less complaisant rivals. Especially with the owners of 
the weaker mills do such considerations have weight. 
They hasten to take advantage of an opportunity to 
secure the trade of the best mills, which are usually the 
last to grant the demands of the strikers. In the strike 
of the International Association of Machinists, in 1901, 
a large number of the strikers almost immediately ob- 
tained the nine-hour day, but they were most of them 
employed in the smaller shops, which took this easy, if 
short-sighted, method to fill their books with orders. 

"Combination was, on the foregoing account, greatly 
desired by manufacturers in order that by its means 



MS ECONOMICS 

the menacing growth of the power of organized labor 
might be checked, and the manufacturers, freed from 
the hobbles of mutual distrust and suspicion which com- 
petition had fastened upon them, might stand firmly 
together against what they believed to be the unreason- 
able demands of the unions." ^ 

The necessity of combination in order to resist the 
demands of organized labor is now generally recognized, 
and even when employers are not combined in trusts they 
form associations for mutual protection. Because of 
their large means, they are able to raise amounts of 
money far greater than the resources of the strikers. 
The formation of these associations, as well as the ex- 
istence of a large number of industrial combinations, 
has in recent years greatly moderated the demands of 
organized labor and disposed the labor leaders to adopt 
the methods of conciliation and compromise. 

195. Collective bargaining better than the strike. — 
The method of settling labor disputes by warfare is 
deplorable; it leads to bad feeling between employers 
and employes and, as Dr. Warne shows, leads also, in 
many cases, to violation of law and sometimes to blood- 
shed. Various kinds of intimidation by strikers to keep 
outsiders from taking their places are almost invariably 
employed. Most large strikes are attended with a con- 
siderable amount of riot and disorder, many lives are 
sometimes lost and much property destroyed. The 
method of collective bargaining is so far superior to 
that of tlie strike in the settlement of disputes between 
employer and employe, that intelligent labor leaders and 
em]:)loyers are everywhere seeking to employ it wlienever 
occasion arises. Compulsory arbitration of labor dis- 
putes has been frequently advocated to force the contend- 

1" Trust Finance," E. S. Meade, p. 71. 



LABOR ORGANIZATIONS 249 

ing parties together in the interest of the pubHc, but it is 
far better that this result should be reached by voluntary- 
action of the parties interested than that the state should 
interfere in settling the terms of the wage contract. 

196. Other activities of trades unions. — Labor unions 
are active in improving the condition of their members 
in other ways than in contests with employers. They 
have been prominent in advocating labor legislation for 
the reduction of hours of labor, and for the regulation 
of child labor and the labor of women. They are 
responsible for laws prohibiting the payment of wages 
in store orders, the repeal of laws entitling creditors 
to attach wages for debt, and many other laws which 
are calculated to improve the position of the workman. 
Many unions maintain insurance funds and sick-benefit 
funds which are of great assistance to their members. 
Trade unions, when they have monopolized the supply 
of labor within an industry or a district, restrict the 
supply of labor, usually by imposing restrictions upon 
admission to the union, or by limiting the number of 
apprentices, and sometimes, though infrequently, by im- 
posing such a high standard of excellence as a condition 
of admission that only a limited number of applicants 
can measure up to the standard. 

197. Employers' attitude toward the closed shop. — 
Labor unions are severely criticised by employers. It 
is claimed that their efforts to limit the right of a bus- 
iness man to employ whom he wishes and of laborers 
to work for whom they please, is a violation of the 
liberty of the emploj^er. Thus Mr. Geo. H. Ellis, pres- 
ident of the United Typothetas of America in an article 
on "The Fallacy of the Closed Shop" in which none 
but union men are to be allowed to work, says : 



250 ECONOMICS 

It is the claim only of him who wishes to establish a monopoly 
in his particular line to the detriment of the general public. 
Where would this boasted "land of the free" be to-day had the 
theory of the "closed shop" been imported by our forefathers? 
Was not the early settlement of this country itself a protest 
against the "closed shop" in religion? Has the blood of which 
we have been so proud deteriorated until we are ready to con- 
sider our labor, whether of head or hands, or both, merely a 
commodity to be bought and sold like the labor of so many 
oxen? And yet the president of a prominent skilled labor union 
has said in my presence that he hoped to see the time when labor 
w^ould be so organized that any employer wanting additional 
help would send to the union headquarters for so many hours 
of labor as he would send to the grocers for so many pounds of 
sugar. ^ 

198. Unreasonable demands of trades unions. — The 
lawlessness and tyranny which characterize the admin- 
istration of strikes, and the unwillingness or the inability 
of leaders to restrain their members from acts of vio- 
lence, extending often to arson and murder, constitute 
the most serious indictment against labor organizations. 
They are also denounced because of the unreasonable 
demands which they frequently make upon employers, 
demands which often take no account of the right of 
the employer to make a fair return on his investment. 
An illustration of such demands were the efforts of the 
United ^line Workers in 1908 to secure from the an- 
thracite operators an advance of wages, a reduction in 
the hours of labor, a recognition of the principle of 
the closed shop, and the abolition of the conciliation 
board, which was established by the strike commission 
of 1902 and on which both operators and mine workers 
had equal representation. These demands were made 

1 Geo, H. Ellis, "The Fallacy of the Closed Shop," Annah of the Amer- 
ican Academy of Political and Social Science, May, 1906. 



LABOR ORGANIZATIONS 251 

at a time when business Was everywhere depressed and 
wages were generally being reduced in other occupa- 
tions, and in spite of the fact that the conciliation board 
had given general satisfaction, and that conditions in 
the anthracite industry during the preceding seven 
years had been generally satisfactory. The employers 
stood firm against granting these demands and the 
union withdrew them. 

199. Opposition to labor-saving machinery. — The 
limitation of the amount of work which members of the 
union are allowed to perform is also denounced as inter- 
ference with industrial progress. 

The recent decline of the British manufactures may be attrib- 
uted more largely to this mistaken policy than to any other sin- 
gle cause. A writer in the London Times has shown, in a series 
of articles on "The Crisis in British Industries" that the 
"canny" system has reduced the product of an English trade 
unionist's work to a point where his labor, once the most profit- 
able in the world, now frequently nets a loss to his employer. 
It is stated that thirty years ago an English bricklayer would 
lay 1,200 bricks in a day, now the maximum allowed by 
the union is 400. Nor is this the only means adopted to 
effect limitation, for the British unions have refused to allow 
the introduction of improved machinery, they have adopted 
stringent rules limiting the hours and rate of its operation, 
and when these measures were found not to be efficacious have 
deliberately planned its injury or destruction. In some shops, 
after the failure of the above means, the disappointed men 
have committed serious crimes by malicious and persistent inter- 
ference with the operation through the changing of feeds and 
speeds, "racking" by reckless running, "forgetting" to lubri- 
cate, or the breaking and "losing" of small parts. The defense 
of the limitation of output on the part of certain unions is 
that without it the normally average worker would be forced to 
come up to the standard set by the strongest and most skillful, 



252 ECONOMICS 

and in this way become worn out and useless before his time. 
If this were proven true, or even well substantiated, it would 
merit attention and become a proper subject of governmental 
control. The charge, however, is baseless. . . . Labor 
unions which embrace this policy of restriction of output as a 
means of maintaining the status of their trade should reflect 
that it offers the very greatest stimulus to the invention and per- 
fection of automatic machines which dispense more and more 
with skilled hand-workers and skilled attendants. In the foun- 
dry, for example, molding machines operated by unskilled labor- 
ers, or even boys, are fast displacing skilled molders in the 
lighter class of work and their scope is being continually en- 
larged.^ 

200. Most promising field for trade union develop- 
ment. — It may, in conclusion, be questioned if the trade 
union as now organized and administered offers the best 
method of increasing wages. That the activity of the 
unions has resulted in increasing wages in many cases 
cannot be doubted. The fear of the strike has been 
far more successful than the reality of the strike in 
forcing employers to accede to the demands of organized 
labor. The influence of organized labor upon wages 
has, however, I believe, been small compared with the 
effect of the increasing productivity of labor as a residt 
of the larger use of machinery and the increase of the 
intelligence of the working classes. The most prom- 
ising field for trade unions development lies in raising 
the standard of admission into the union, in making 
sure that none but sober, reliable and competent men 
are admitted to membership. This policy has been fol- 
lowed out with conspicuous success by such organiza- 
tions as the Brotherhood of Locomotive Engineers, wlio 
in effect guarantee the efficiency of their members, so 

1 Alexander E. Outerbridpe, Jr., Annals of the American Academy of 
Political and Social Science, Nov., 1903. 



LABOR ORGANIZATIONS 253 

that railroad companies are glad to employ members 
of the Brotherhood whenever they can be obtained. If 
trade unions modified their policy by establishing a 
monopoly not merely of number but of quality and 
efficiency, as the railroad brotherhoods have done, it will 
not be necessary for them to resort to the dangerous 
methods of the strike in order to enforce their demands. 
With unions so organized and so constructed, employers 
will be glad to recognize them and to grant the reason- 
able requests for higher wages and the conditions of 
employment. 



CHAPTER VI 

RENT 

201. Rent defined. — Among botli the income and 
expenditures of the Reading Coal and Iron Company 
which we have selected as the basis of our illustratior. 
of distribution, Avere items variously called rents and 
royalties. The total of the expenditures for royalties 
was $458,522.89. The paj^ment on account of 
rentals appears in the accounts of almost every business. 
It is of particular importance, therefore, that we should 
understand how rent payments are fixed and upon what 
their amouiit depends. 

We may define rent as the amount paid to the owner 
for the use of some natural resource, such as land or 
mineral deposits or water power, or for the use of some 
form of fixed capital, such as a wharf or a building, 
or, in many cases, for the use of machinery. The 
amount of rent to be paid in each case is stipulated in 
a contract known as a lease by which the owner of the 
thing leased, known as the lessor, agrees to transfer 
to the tenant or lessee the right to occupy and to use 
his property in a prescribed way, and for a definite 
time, on payment by the lessee -of a stipulated rent. 
These contracts are for various terms. A dwelling 
house is ordinarily rented by the month or year, a' farm 
for three or five years, a railroad sometimes for 999 
years. With mining leases the term of the lease fre- 
quently extends to the time when the mine shall be 
exhausted. 

254 



RENT 255 

202. Forms of rent payments. — The payment of rent 
is made in various ways. Where the property is not 
destroyed by use, the rent is paid periodically ; monthly, 
quarterly or yearly. In the case of mines, however, 
the rentals of which are known as royalties, payment is 
made according to the quantity of mineral extracted, 
for example, five or ten cents per ton. An illustration 
of mineral leases is furnished by the transaction by 
which the United States Steel Corporation acquired con- 
trol of the iron ore lands in Minnesota owned by the 
Great Northern Railroad. In November, 1906, a lease 
was made with the Great Northern, by which the United 
States Steel Corporation acquired on a royalty basis 
iron ore deposits containing an estimated amount 
of 500,000,000 tons of ore. The ore mined by 
the lessee was to be delivered by the railroad on 
the Lake Superior docks. The United States Steel 
Corporation agreed to pay 80 cents per ton for the 
transportation of the ore and 85 cents per ton as royalty 
on the ore extracted, this amount to increase 3.4 per cent 
per ton until 1917. The steel corporation agreed to 
mine from these ore lands a maximum amount of 750, 
000 tons in 1907 and thereafter ^50,000 tons additional 
for each succeeding year until the output reaches 8,250, 
000 tons in 1917. At this time, the royalty paid will 
be $1.19 per ton, and the total rental paid by the United 
States Steel Corporation, including 80 cents per 
ton paid to the railroad for transportation, will be 
$16,417,500. 

Mineral royalties are generally fixed on such a basis 
as to return, not merely interest to the owner of the 
mineral property, but also, since his property is ex- 
hausted by use, to replace its value to him by the time 
it is exhausted. In all leases of productive property. 



256 ECONOMICS 

such for example as street railways, provision is made 
that the lessee shall keep the property in repair and shall 
replace any part of it which may be worn out. Any 
improvements or additions which the lessee may make 
to the lessor's property, in the absence of some stipula- 
tion to the contrary in the contract, become the prop- 
erty of the lessor at the expiration of the lease. I' arm 
property is frequently rented on shares, the owner 
taking a certain percentage of the value of his crop 
as his rent, usually 50 per cent. 

203. How the amount of rent is determined, — The 
amount of rent is determined by the value to the lessee 
of the productive land whose use is conveyed to him 
for a term of years. The tenant's or lessee's estimate 
of the value of the property which he leases depends 
either upon the satisfaction which he and his family 
get from using the property, as in the case of a dwell- 
ing house, or upon the profit which he can make by 
the employment of the property which he has rented. 
The profit depends upon the net value of the produce 
which can be turned out by the use of the land, or mine, 
or wharf which is made the subject of the lease con- 
tract. 

In order to operate a farm, an intending tenant must 
have the wherewithal to ecjuip it. Farm animals, tools, 
machinery and seed, or the money to buy these, are 
necessary, with sufficient funds in addition to support 
the tenant and his family until he sells his crop. This 
preliminary expenditure is his investment in the farm- 
ing business. The amount he invests is his capital, and 
on that capital he expects a certain rate of return. In 
addition to tliis return on his money outlay, he must 
hivest liis labor, either the labor of his hands or tlie 
labor of supervision, and for his labor he deserves com- 



RENT S57 

pensation. He also expects, although, as we shall see, 
his expectation is not often realized, to make something 
more than wages as his profit. What remains after 
these payments are met he will pay to the landlord as 
rent. As a class farm tenants will not pay as rent any 
more than the surplus over the interest on their capital 
and the wages of their labor. If a landlord tries to 
get more than this for his farm, the farm will be un- 
occupied. The .competition of landlords for tenants 
will prevent their rent from rising above the figure men- 
tioned, and the competition of tenants for farms will 
prevent rent from falling below this figure. 

204. Agricultural rents. — It is evident that the more 
fertile and productive a given farm is, the larger will 
be the return which the tenant can make from its occu- 
pancy and the higher will be the rent paid. The primary 
causes determining agricultural rent are: (1) fertility 
of the soil and the equipment of the farm with buildings, 
drains and fences; (2) prices of the products produced 
from the farm; (3) the location of the land. 

Taking these up in order, we find that in any section 
where farms are rented, the amounts paid for different 
farms will vary widely according to their respective 
equipment. One farm has been carefully cultivated for 
many years, the fertility of the soil increased by the 
liberal application of fertilizers, commodious farm build- 
ings erected, fences kept in good repair, and a large 
expenditure made on ditching and tiling. Another 
farm, perhaps adjoining the first, has been seriously 
neglected, its equipment is poor, its fertility is low as 
result of the failure of the tenant or owner to use the 
necessary amount of fertilizer. The natural fertility 
of the first farm was no greater at the outset than that 
of the second, and yet the rent which will be paid for 

1—17 



258 



ECONOMICS 



the first farm is several times that which the second 
will command. 

At any given time every farmer knows that there is a point 
beyond which it will not pay him to invest .labor and capital 
upon each acre of land. An investment of five dollars per acre 
may yield a return of twelve bushels of wheat. Possibly an in- 
vestment of ten dollars might have resulted in a product of 
twenty-four bushels. But the crop secured from a single acre 
of land cannot, at any given time, be made to double indefinitely 
by doubling the investment of labor and capital. To continue 
our illustration, suppose that fifteen dollars had been invested 
upon the given acre of land instead of ten dollars. Then it is 
probable that the crop would have been increased, but it is not 
likely that it would have amounted to thirty-six bushels. Sup- 
pose the investment of fifteen dollars to yield a crop of thirty 
bushels. Then the results of investing the three different 
amounts of capital upon the given acre of land would have 
been as follows: — 







Average Yield to each 


Investment. 


Crop. 


Dollar of Labor and 
Capital. 


$5 


12 bushels 


2.4 bushels 


$10 


24 bushels 


2.4 bushels 


$15 




30 bushels 


2.0 bushels 



It is evident that, on the piece of land in question, an invest- 
ment of fifteen dollars will secure a larger yield than an invest- 
ment of ten dollars ; but that the average yield secured by each 
dollar of labor and capital is less than it would have been had 
the investment been limited to ten dollars. It would have been 
better if tlie third five-dollar investment had been made upon 
another piece of land. This is an illustration of the method 
in which a law of diminishing returns operates in agriculture. 
As the investment of labor and capital upon an acre of land 
increases, a point is finally reached beyond which an increased 



RENT 259 

investment would yield a larger aggregate but a smaller pro- 
portionate return. If this were not true, we should continue to 
raise all our agricultural produce from a few acres of land, 
and would never have taken the trouble to reduce other fields to 
a condition suitable for cultivation. 

It will be noticed that care was taken to say that the law of 
diminishing returns is true at any given time. In any season, 
when labor and capital are invested in the cultivation of land, 
agricultural methods and skill have reached a certain stage of 
advancement, and will not be materially changed during that 
season. They are, therefore, relatively fixed ; so that the econo- 
mist can say that, at any given time, investments of labor and 
capital can be carried only to a certain point before they will 
begin to yield a diminishing return. On the other hand, if we 
compare one season with another, or compare one period of 
years with another, no law of diminishing returns may be found 
to hold true. Scientific agriculture is each year making it 
possible to invest more capital upon land without encountering 
a point of diminishing returns. Continuing our illustration, 
we may suppose that improved methods of cultivation are orig- 
inated, and that these improvements make it possible to invest 
fifteen dollars upon each acre of land and to secure an average 
yield of thirty-six bushels per acre. The law of diminishing 
returns, therefore, is true only at a given time. At one season 
it is possible to invest only ten or fifteen dollars in cultivating 
each acre of wheat before arriving at a point of diminishing 
returns. Improved methods of farming may, however, after a 
period of years make it possible to invest fifteen or twenty dol- 
lars on each acre, and to secure a proportionately increased 
return. Bearing these considerations in mind, we can state the 
law of diminishing returns as Professor Marshall has formulated 
it : "An increase in the capital and labor applied in the cultiva- 
tion of land causes in general a less than proportionate increase 
in the amount of produce raised, unless it happens to coincide 
with an improvement in the arts of agriculture." 

We have seen elsewhere that the population of civilized 
countries is increasing, and is likely to increase for a considerable 



260 ECONOMICS 

time to come. This fact will make it necessary to raise more 
agricultural products as fast as numbers increase. The law of 
diminishing returns has sometimes been considered to imply 
that, when all lands now vacant shall have become occupied, men 
will secure increased supplies of agricultural products only by 
applying more and more capital and labor to land that will yield 
a constantly diminishing return. Such a conclusion is wholly 
unwarranted. From year to year the progress of agriculture 
is making it easier than ever before to secure the products of 
the soil. There is reason for thinking that scientific agriculture 
is only in its infancy, and that in the future its progress will 
be much more rapid than in the past. — C. J. Bullock, "Introduc- 
tion to the Study of Economics," pp. 170-173. 

205. Influence of price on rent. — The importance of 
the second factor, namely, the price of the product in 
determining rent, will readily be perceived. The rent 
is a certain sum of money deducted from the gross 
receipts of the farm. These gross receipts represent 
the quantity of produce multiplied by the amoimt ob- 
tained for each bushel or ton produced. No matter 
how great the quantity of produce may he, if its price 
is steadily falling, as the price of wheat fell with few 
interruptions from 1885 until 1897, the rent paid for 
the farms which produce this wheat must also decline. 
During the term of the lease, it is true, the tenant has 
no remedy for a decline in prices, just as the landlord, 
during the same term, cannot raise his rents if prices 
advance. When the lease expires, however, and the 
(juestion of a new lease is taken up, the decreasing pro- 
ductivity of the farm, as a result of the decline in 
prices will usually be made the basis of a successful 
claim for a reduction in rent. On the other hand, an 
increase in the productivity of a farm due to rising 
prices or to the location of a factory in the neighbor- 



RENT 261 

hood, which will make a market for fruits and vege- 
tables, will enable the landlord to obtain an increase 
in rent. 

206. Location in relation to rent. — The third deter- 
minant of rent, the location of the land, is equally im- 
portant with the other two. We shall have present 
occasion to discuss this question in reference to city 
ground rents, but the location of land is also important 
in determining agricultural rent. Land in the neigh- 
borhood of large cities, for example, commands very 
large rentals because it can be used for truck farming. 
The importance of location is, however, diminished by 
the fact that the railroads in fixing rates upon com- 
modities, endeavor so far as possible to equalize dis- 
tances so as to place every producer upon an equality 
of advantage with every other producer of the same 
goods. The railroads, in other words, whenever the law 
does not forbid them, charge the same rate for a long 
haul that they do for a short haul. They do this in 
order to increase the volume of traffic. By enabling 
a dairy farmer living one hundred miles away from 
iNew York to ship his milk into that city at the same 
rate as one residing twenty miles away, the volume 
of milk traffic passing over the road is much increased, 
and the profits of the railroad are larger than they 
would be if the rate were increased proportionately 
with the distance. The cost of transportation has been 
so greatly reduced during the last thirty years that 
English grain farmers have been hard pressed in com- 
peting for their local markets with grain grown four 
thousand miles away in Dakota or Minnesota. 

207. The rent of mines. — The rent of mines is deter- 
mined by the same factors which fix the rent of agri- 
cultural land. The richness of the ore is a controlling 



26^> SiCQNOMlca 

factor. For example, in the Great Northern ore lands 
above mentioned the rental payments are conditioned 
upon the ore running 58 per cent in iron content. For 
any reduction in the richness of the ore below this stand- 
ard a proportionate reduction must be made in the roy- 
alty. The cost of mining, the price of the metal 
produced from the ore and the distance from the market 
as bearing upon the cost of transportation, are all fac- 
tors in fixing the rent of mines. We have here another 
illustration of the principle that the rental of a pro- 
ductive instrument will be based upon the return which 
can be made by its use. 

208. Ground rents. — Ground rents are determined 
on principles which differ somewhat from those which 
explain the rent of agricultural land. Land used for 
building purposes is valued not because of its pro- 
ductivity, but because it offers standing room for build- 
ings which may be rented for business purposes. The 
rent in each city, therefore, depends upon the income 
which can be obtained from the building to be erected 
upon it. This income varies primarily with the location 
of the building. The largest income can be obtained 
from stores and office buildings in the central sections 
of large cities and from apartment houses and hotels 
on the principal streets. In these sections ground rents 
are highest. Next comes income from slum properties 
which pay enormous returns because so many people 
can be crowded into a small space. Next in order, 
comes ground in the middle class residential section, and 
finally suburban sections for suburban residences and 
factory sites. Within the city, the rents of a particular 
piece of property are influenced by a variety of con- 
siderations, nearly all of which relate to the income 
to be derived from the use of the property. When 



RENT 263 

buildings, for example, are to be utilized for retail shops, 
the value of the location will depend upon the number 
of people who pass the store. 

Retail stores either cluster at the business center or follow 
out traffic streets. In retaiHng the buj^er necessarily seeks the 
seller, but since in all forms of trade it is the seller who is anx- 
ious to promote business, the retailer facilitates his possible cus- 
tomers by placing his shop where the largest number of them 
would pass, even though his shop were not there. Here he util- 
izes his shop windows and signs to draw customers into his shop, 
the two elements of convenience of location and advertising ad- 
vantage working hand in hand.^ 

209. Location of retail stores. — Upon this subject 
Mr. R. M. Hurd writes most clearlj: 

The display of goods is vital for shops, and in order to dis- 
play goods shade is necessary ; hence the side of the street 
which is shady during the part of the day in which women shop 
is normally worth from 20 to 40 per cent and occasionally 
100 per cent more than the sunny side of the street. The 
west side of streets running north and south, and the south side 
of streets running east and west, are shady the greater part of 
the year from about 12 or 1 o'clock on, permitting a display 
of goods without fear of fading and rendering the sidewalk 
agreeable. The greater part of the purchasing in the large 
shops is done by women of the middle classes, whose household 
duties prevent them from reaching the shops until after 11 
o'clock. The busiest shopping hours are from 11 o'clock to 
4 o'clock, many women taking lunch either in the department 
stores or in restaurants nearby. The women of wealth shop 
usually in the morning between 11 and 2 o'clock, so that even 
in their case the west or south side of the street has some ad- 
vantage of shade. In southern cities where shade is even more 
important, the relative value of the four corners of two inter- 

1 R. M. Hurd, " Principles of City Land Values," p. 75. 



264. ECONOMICS 

secting business streets is well defined, the southwest comer 
being the most valuable, the southeast next, tlic northwest next, 
and finally the northeast corner. This refers only to retail shop- 
ping fronts, the corners having a different order of preference if 
desired for other purposes, such as hotels or office buildings. It 
is said that in such northern latitudes as those of St. Petersburg 
and Montreal the sunny side of the street is more valuable than 
the shady side, since it attracts the travel in the long winters. 
In New York some difference can be noted in the tides of foot 
travel according to the time of the year, but since for eight or 
nine months of the year the climate is mild, the shops become 
established on the shady side of the street and whatever travel 
in winter changes to the sunny side is not sufficient to draw 
them over.^ 

210. Other factors determining the value of loca- 
tions. — The above illustration shows in detail the factors 
which influence the value of location for a specified 
purpose. Other influences operate in other cases. 
Thus, the value of location for a bank building depends 
on its situation within the financial district, and, in large 
cities, near the various exchanges. Stores handling 
fruit, books, flowers, etc., are mainly located in large 
cities near ferries and railroad depots, since these ar- 
ticles can be purchased and carried home. Restaurants, 
saloons and cigar shops are mostly located along the 
line of evening travel, especially near the theatres. The 
movement of ground rents is influenced by any cause 
which influences the earning power of buildings. 

The general principle of ground rents is thus cor- 
rectly stated by a prominent real estate operator in 
Philadelphia: "As long as these United States grow, 
and grow they must, just so long will realty in central 
sections of our large cities increase in value." This is 

1 R. M. Hiird, " Principles of City Land Values," p. 90. 



KENT 265 

illustrated by the movement of ground rents on Man- 
hattan Island where the increase in population has raised 
rent, and where the fixed charge upon income caused 
by excessive rentals which must be paid are responsible 
for a serious lowering of the standard of living. Tak- 
ing additional illustrations of this principle from Man- 
hattan Island, the construction of the subway caused 
a material advance in rents all along its route, and the 
advance was much greater in the neighborhood of the 
express stations than near the local stations, the reason 
being that a larger number of people would use the 
subway at the express stations. 

The construction of street railways, and especially 
the application of electric motive power to urban trans- 
portation, have exercised a profound influence upon 
ground rents. Rapid transit has scattered population 
over wide areas, adding value to the outlying sections 
by rendering them acceptable for residences, and to 
the central sections by increased traffic. In the dis- 
tricts lying intermediate between the suburbs and cen- 
tral sections, ground rents have generally declined. 
The new lines of street railways in the suburbs has 
greatly increased the available supply of land, reducing 
the value of all competitive land and lowering the 
average value of residence property. To these low 
rentals in the outlying sections, however, has to be added 
the cost of street railway transportation, so that the re- 
duction is not so great as would otherwise appear. 

211. Building rentals. — ^When we understand th^ 
principles determining ground rents, we also under- 
stand those which determine building rents. The owner 
of the building is in the same position as the owner of 
the land. (In fact, in the United States, the same per- 
son usually owns both the building and land.) He 



266 ECONOMICS 

^^•ishes to get as large a return as possible on his in- 
vestment. On the other hand, the tenant has the choice 
of a number of properties. If the building is to be 
used for business purposes, the amount the tenant will 
pay will dej)end upon what he can earn in the store or 
that office, and will increase, as we have seen, with 
the earning power of the location. Many other factors, 
however, influence building rentals, such as the willing- 
ness of the landlord to make repairs, the presence or 
absence of an elevator, the appearance and interior 
fittings of buildings, the ventilation, the amount of 
light which the rooms receive, the convenience of the 
building for manufacturing or retailing — all these are 
factors which determine the amount of rent. The most 
important consideration, however, to which all these are 
subordinate, is the location of the building. 

212. Econo77iic rent. — In this discussion we have 
treated rent from the standpoint of the landlord, as 
a form of investment on which he desires to get as 
large a return as possible, and from the standpoint of 
the tenant, as a business or personal responsibility for 
which he wishes to get the largest possible return in 
income or comfort. Economists have generally dis- 
cussed the subject in a somewhat different way, treating 
the rent of a piece of land, for example, as the excess 
of its earning power over the earning power of the 
])oorest piece of land of equal extent cultivated for 
the same market. This they term "no-rent land." 
According to this view, tlie owners of labor and capital, 
since they would otherwise be obliged to resort to the 
poorest land will pay to the owners of the better grades, 
tlie difference between the yield of no-rent land and the 
land which thev rent. We shall have occasion to con- 



RENT 267 

sider this theory in our discussion of the single tax on 
land values/ 

If all land had the same properties, if it were unlimited in 
quantity, and uniform in quality, no charge could be made for its 
use, unless where it possessed peculiar advantages of situation. 
It is only, then, because land is not unlimited in quantity and 
uniform in quality, and because in the progress of population, 
land of an inferior quality, or less advantageously situated, is 
called into cultivation, that rent is ever paid for the use of it. 
When in the progress of society, land of the second degree of 
fertility is taken into cultivation, rent immediately commences 
on that of the first quality, and the amount of that rent will 
depend on the difference in the quality of these two portions of 
land. 

When land of the third quality is taken into cultivation, rent 
immediately commences on the second, and it is regulated as 
before, by the difference in their productive powers. At the 
same time, the rent of the first quality will rise, for that must 
always be above the rent of the second, by the difference between 
the produce which they yield with a given quantity of capital 
and labor. With every step in the progress of population, 
which shall oblige a country to have recourse to land of a worse 
quality, to enable it to raise its supply of food, rent, on all the 
more fertile land, will rise. 

Thus, suppose land — Nos. 1, 2, 3 — to yield, with an equal em- 
ployment of capital and labor, a net produce of 100, 90, and 
80 quarters of corn. In a new country, where there is an abun- 
dance of fertile land compared with the population, and where 
therefore it is only necessary to cultivate No. 1, the whole net 
produce will belong to the cultivator, and will be the profits of 
the stock which he advances. As soon as population had so far 
increased as to make it necessary to cultivate No. 2, from which 
ninety quarters only can be obtained after supporting the labor- 
ers, rent would commence on No. 1 ; for either there must be two 

1 The reader will find the theory of economic rent elaborated in John 
Stuart Mills' " Political Economy." 



268 ECONOMICS 

rntcs of profit on agricultural capital, or ten quarters, or the 
value of ten quarters must be withdrawn from the produce of 
No. 1, for some other purpose. Whether the proprietor of 
the land, or any other person, cultivated No. 1, these ten quarters 
would equally constitute rent ; for the cultivator of No. 2 would 
get the same result with his capital, whether he cultivated No. 1, 
paying ten quarters for rent, or continued to cultivate No. 2, 
paying no rent. In the same manner it might be shown that 
when No. 3 is brought into cultivation, the rent of No. 2 must 
be ten quarters, or the value of ten quarters, whilst the rent of 
No. 1 would i-ise to twenty quarters ; for the cultivator of No. 3 
would have the same profits whether he paid twent}^ quarters for 
the rent of No. 1, ten quarters for the rent of No. 2, or cultivated 
No. 3 free of all rent. — David Ricardo, "Principles of Political 
Economy," Chapter II. 



CHAPTER VII 

INTEREST 

213. Interest universal. — Referring again to the 
statement of the income and expenditures of the Phila- 
delphia and Reading Coal and Iron Company, we find 
the sum of ^85,455.38 set down as fixed charges and 
taxes. Most of this sum represents interest. In the 
income column we also find an item of interest and 
dividends. Most large corporations both receive and 
pay interest, and the interest charges of the majority 
absorb the largest portion of their earnings after the 
payment of wages. There are few business men who do 
not have interest to pay as one of their regular dis- 
bursements. Interest is as universal a phenomenon of 
the business world as is wages. 

214. Why interest is paid. — From the standpoint of 
the borrower, the object of paying interest is to secure 
control of present funds because these are exchangeable 
for capital goods, for natural agents, and for labor. 
The object in securing control of these productive agents 
is to combine them in the productive process to produce 
other goods for the market. By making this combina- 
tion, the producer increases their utility, makes them 
more desirable to the purchaser, and raises the price 
which will be paid for them. The process of produc- 
tion, in other words, creates a sum of value which ap- 
pears in the form of current funds received by the 
producer in the price of his product, or the rate received 

269 



270 ECONOMICS 

for his services, out of which the various payments which 
we have discussed are made. 

215. Interest paid for' money. — The practice of bor- 
rowing and lending capital is in common use, but before 
the borrower can get control of capital, that is, of pro- 
duction goods, he must first get control of a particular 
form of capital — money or funds — which he may ex- 
change, not merely for production goods, but for labor 
and natural agents, franchises and other indispensable 
aids to production. 

Interest has been defined as the amount paid for the 
use of money. This definition is not strictly correct. 
In our discussion of credit we have seen that what the 
bank lends or sells is not money in a sense of gold and 
token money, but money and credit both. INIoney and 
credit may be included under the head of funds. We 
may change the definition of interest, therefore, and 
say that it is the price for the use of funds. This 
modified definition is still incorrect. The bank does 
not borrow the notes of its customers, it buys these 
notes. What it gives in exchange, moreover, becomes 
actual property of the borrower. In one celebrated 
instance the cashier of a failed Florida bank who had 
received money the day before the failure from two de- 
positors, giving them credit at the time in their pass 
books, was arrested at the instance of the deposi- 
tors, who alleged that he had taken their money and 
refused on demand to give it back to them. The 
offending cashier was indicted, placed on trial, and con- 
victed in the lower court, but the decision was reversed 
on the ground that the depositor had exchanged his 
money for the promise of the bank to pay him money 
on demand, in otlier words, for the credit of the bank, 
and had therefore lost all title to the money. 



INTEREST 271 

216. Interest and discount identical. — The business 
of banking is, therefore, a business of buying and sell- 
ing. We shall, however, continue to use the terms 
borrowing and lending now that we understand exactly 
what they mean. The customer of the bank buys money 
or funds, and he pays for these funds with his promise 
to pay money at a future time. He buys $985, deliv- 
ered to him immediately over the bank's counter, if he 
desires it, and he gives in exchange a promise to pay 
$1,000 three months from date. The difference be- 
tween the money which he receives and the amount 
which he promises to pay is interest. Interest may be 
defined, therefore, as the discount at which promises to 
pay money in the future can be exchanged for present 
funds. This definition will be found to explain not only 
bank loans, where this truth is made apparent in the 
term discount, but also those cases where the full amount 
borrowed is delivered to the borrower at the time the 
loan is made. 

Take the case of a loan made on mortgage security, 
for example. Here a farmer borrows $5,000 at 6 per 
cent for five years from January 1, 1913, and he 
receives $5,000 down in cash. In return, he gives his 
promise to pay $5,000 in 1918. In this case, as in the 
case of bank discount, $5,000 of present funds are pur- 
chased with the promise to pay back the sum of $6,500 
at various dates in the future. 

217. Forms of security for loans. — In order to insure 
the keeping of these promises by the debtor, the creditor 
usually demands that the borrower enter into a supple- 
mentary contract of security. It is true that if the obli- 
gation is not met when due, the creditor can sue the 
debtor, and can obtain judgment against him, have the 
debtor's property seized by order of the court, and sold 



272 ECONOMICS 

up to the amount necessary to satisfy his claim. An 
additional contract of security is, however, usually 
demanded. 

Security contracts have been defined as agreements 
by which the borrower obtains a favorable judgment 
as to Ills wilhngness and ability to pay, which favorable 
judgment, in the absence of such a supplementary con- 
tract, would be lacking. These contracts of security 
are in various forms: first, endorsement by a third 
party who writes his name on the back of the note and 
thereby promises to pay the note if the borrower fails to 
pay it when due. In order to hold the endorser, it is 
necessary for the lender, immediately after the time of 
payment expires, to make public declaration of this fact 
through a notary public and to notify the endorser. 

218. The mortgage. — The second form of securitj'- is 
the mortgage. A mortgage is an instrument bj'- which 
certain property is conveyed in trust to the creditor or 
his representative. In the case of the pledge of real 
property, such as a house or a railroad as security for a 
loan, the property remains in the possession of the 
debtor, and the trust does not become active unless in- 
terest or principal is not paid wlien due. The nature 
of this grant appears in the following extract from a 
mortgage issued by a steamship company to secure an 
issue of bonds. 

That for the pui*pose of securing the payment of the prin- 
cipal and interest of each and all of said bonds at any time out- I 
standing under the authority aforesaid, . , . the said I 
transportation company has . . . conveyed, confimied, as- 1 
signed, transferred and set over . . . unto said trustee^ 
their successor or successoi's and assigns, forever, all the fol- 
lowing described real and personal property, estates, rights, privi- 
leges and appurtenances. . . . To have and to hold, all and : 



INTEREST ^73 

singular said property, real, personal and mixed, together with 
the appurtenances thereof, unto the said Trustee . . . but 
IN TRUST nevertheless, for the equal and proportionate benefit 
and security of all present and future holders of bonds and in- 
terest coupons issued under and secured by this indenture, and 
for the enforcement of the payment of said bonds and interest 
when payable according to the tenor, purpose and effect thereof. 

The advantage of this conveyance to the creditor is 
that the property named in the mortgage is set apart as 
the security for his obligation, and no lien or en- 
cumbrance can be placed upon this property which will 
rank ahead of his own. In case interest or principal is 
not paid, therefore, the creditor has certain property 
which is set aside for his protection which can be levied 
upon after he has proven his claim in court. 

219. Collateral security. — Collateral security is also 
frequently demanded. In this form of security con- 
tract, some kind of property, usually shares of stock or 
corporation notes, or warehouse "receipts" certifying 
to the ownership of wheat or cotton or coffee, are put in 
the actual possession of the creditor under an instrument 
authorizing him, in case the interest or principal is not 
paid, to sell the property at public or private sale without 
giving notice to the debtor, to .pay the debt out of the 
proceeds of the sale, and to return any balance to the 
debtor. In collateral and mortgage contracts of 
security, the transaction reduced to its lowest terms is as 
follows : The debtor appoints the creditor or his repre- 
sentative, his (the debtor's) trustee, and authorizes the 
trustee to discharge his obligation in case the debtor can- 
not pay. To enable the trustee to carry out the terms 
of his trust, certain property is conveyed to him which 
he is authorized to sell, pay the debt and return the 
balance to the debtor. 

1—18 



272 ECONOMICS 

up to the amount necessary to satisfy his claim. An 
additional contract of security is, however, usually 
demanded. 

Security contracts have been defined as agreements 
by which the borrower obtains a favorable judgment 
as to his willingness and ability to pay, which favorable 
judgment, in the absence of such a supplementary con- 
tract, would be lacking. These contracts of security 
are in various forms: first, endorsement by a third 
party who writes his name on the back of the note and 
thereby promises to pay the note if the borrower fails to 
pay it when due. In order to hold the endorser, it is 
necessary for the lender, immediately after the time of 
payment expires, to make public declaration of this fact 
through a notary public and to notify the endorser. 

218. The mortgage. — The second form of security is 
the mortgage. A mortgage is an instrument by which 
certain property is conveyed in trust to the creditor or 
his representative. In the case of the pledge of real 
property, such as a house or a railroad as security for a 
loan, the property remains in the possession of the 
debtor, and the trust does not become active unless in- 
terest or principal is not paid when due. The nature 
of this grant appears in the following extract from a 
mortgage issued by a steamship company to secure an 
issue of bonds. 

That for the purpose of securing the payment of the prin- 
cipal and interest of each and all of said bonds at any time out- 
standing under the authority aforesaid, . . . the said 
transportation company has . . . conveyed, confirmed, as- 
signed, transferred and set over . . . unto said trusteey 
their successor or successors and assigns, forever, all the fol- 
lowing described real and personal propert^s estates, rights, privi- 
leges and appurtenances. . . . To have and to hold, all and 



INTEREST 273 

singular said property, real, personal and mixed, together with 
the appurtenances thereof, unto the said Trustee . . . but 
IK TRUST nevertheless, for the equal and proportionate benefit 
and security of all present and future holders of bonds and in- 
terest coupons issued under and secured by this indenture, and 
for the enforcement of the payment of said bonds and interest 
when payable according to the tenor, purpose and effect thereof. 

The advantage of this conveyance to the creditor is 
that the property named in the mortgage is set apart as 
the security for his obligation, and no lien or en- 
cumbrance can be placed upon this property which will 
rank ahead of his own. In case interest or principal is 
not paid, therefore, the creditor has certain property 
which is set aside for his protection which can be levied 
upon after he has proven his claim in court. 

219. Collateral security. — Collateral security is also 
frequently demanded. In this form of security con- 
tract, some kind of property, usually shares of stock or 
corporation notes, or warehouse "receipts" certifying 
to the ownership of wheat or cotton or coffee, are put in 
the actual possession of the creditor under an instrument 
authorizing him, in case the interest or principal is not 
paid, to sell the property at public or private sale without 
giving notice to the debtor, to .pay the debt out of the 
proceeds of the sale, and to return any balance to the 
debtor. In collateral and mortgage contracts of 
security, the transaction reduced to its lowest terms is as 
follows : The debtor appoints the creditor or his repre- 
sentative, his (the debtor's) trustee, and authorizes the 
trustee to discharge his obligation in case the debtor can- 
not pay. To enable the trustee to carry out the terms 
of his trust, certain property is conveyed to him which 
he is authorized to sell, pay the debt and return the 
balance to the debtor. 

1—18 



274. ECONOMICS 

220. Classes of loans. — The discount on the sale of 
promises to pay money in the future, which we term 
interest, is expressed in the form of a certain rate per 
cent on the sum named in the contract to pay money. 
This may vary from 40 or 50 per cent a year to 1% 
and 2 per cent according to conditions. What now are 
these conditions? Upon what does the rate of interest 
depend? In order to answer this question, we must 
first distinguish between classes of loans. Loans may 
be divided into two general classes, short time loans and 
loans for long periods. Under short time loans we have, 
first, call loans, where the borrower promises to pay 
whenever requested by the lender; and, second, loans 
for periods less than a year — three, four and six months. 
Call loans are usually made in connection with the pur- 
chase of stocks and bonds. Since we do not intend to 
go into this subject in detail, it need detain us no 
longer than to state that the low rate of interest usually 
charged on these loans, is explained by the fact that 
they are usually secured by ample collateral, and that 
they are payable on demand, so that banks may invest 
their surplus funds in this class of loans with the cer- 
tainty that should opportunity arise for making loans 
at higher rates of interest, the funds loaned on call will 
be immediately available. 

221. Short time commercial loans. — Short time loans 
for periods of two to three and four months, are of 
great importance in the conduct of business. Most of 
these notes are offered to the banks by men engaged in 
active business who have money coming to them in the 
future on account of goods sold, but who have present 
expenses to meet for labor, materials, intei'est, taxes, etc. 
In order to obtain funds for these immediate needs, 
they exchange their promises to pay money in the future 



INTEREST 275 

for the right to draw immediately against the bank, and 
they arrange that the promissory notes which they sell 
to the bank shall mature after money is due to be paid 
to them to an amount equal to the face of the notes. 
This transaction is called borrowing in anticipation of 
accounts and bills receivable. 

These loans are made in two forms, either the note 
of the borrower is purchased or the bank buys the 
claims against the borrower's own debtors expressed in 
the form of drafts or promissory notes. In the second 
case the borrower guarantees that the promises to pay 
which have been executed to him and which he has sold to 
the bank, will be promptly paid to the bank when due. 
In the United States it is customary for merchants and 
manufacturers to borrow on their own notes to obtain 
the funds to carry on their business. In England, on 
the other hand, it is customary, as it formerly was in this 
country, for the seller to exact either a promissory note 
or an accepted draft from the buyer, which can be sold 
to the bank with the guarantee of the seller. The 
English system, while not popular in the United States, 
is generally considered to be a more conservative 
method of doing business. In England banks, as a rule, 
purchase accepted drafts, to pay which two responsible 
persons are obligated who have each received value on 
account of the transactions in which the notes originate. , 

222. Long time loans. — Long time loans may be 
divided into three classes; first, loans on real estate 
security; second, corporate bonds; and third, public 
bonds. There are other classes of long time bonds, but 
they are of minor importance. The purpose of loans 
on real estate security is usually the improvement or ex- 
tension of farm or city property or the enlargement of 
the borrower's business. Corporation borrowing is ef- 



276 ECONOMICS 

fectcd by the sale of similar notes usually issued in 
denominations of $500 and $1,000 to an aggregate 
amount in some cases reaching from $50,000,000 to 
$100,000,000. These notes are called bonds. They are 
secured by a mortgage on the property of the corpora- 
tion, either its physical property or other stocks and bonds 
which it owns. This property is conveyed in trust to the 
trustee, usually a trust company, who acts in behalf of the 
creditors. We have already had an illustration of such 
a conveyance. 

Bonds bear interest at a certain rate per cent on the 
principal, which is paid to the holder in quarterly or 
semi-annual installments. The bonds are sold to in- 
vestors in various amounts, and in this way a large 
amount of money can be placed at the service of a cor- 
j^oration. Bonds are usually issued by corporations for 
great works of permanent improvement, such as the 
construction of a railroad or the purchase of cars and 
locomotives, or the enlargement of a terminal. If the 
judgment of the borrowing corporation has been cor- 
rect, the earnings of the company, as a result of the 
investment of the proceeds of these bonds, will be in- 
creased sufficiently to pay the interest, and, if repayment 
of the principal is desired, to accumulate a sum sufficient 
to pay the loan at maturity. The corporation also ex- 
pects to show a profit over the amount of the interest 
and the sum set aside to repay the principal. 

The term of these corporate bonds varies with the 
nature of the business in which the money is to be 
invested. Where the borrowing company owns a large 
amount of real property, or where it has a monopoty 
of a certain business — as, for example, a street railway 
or a gas company — or when its earnings have been large 
and stable for a number of years, long term bonds. 



INTEREST 277 

running sometimes one hundred years, can be readily 
sold. In the case of a manufacturing company, how- 
ever, such as a paper company or meat packing com- 
pany, where the position of the business is not very well 
assured, the assets of comparatively small value, and the 
earnings irregular, the term of bonds is much shorter. 
Bonds of such corporations do not extend more than ten 
or twenty years, since the lender is unwilling to risk his 
money for a longer period. 

223. Public bonds. — Public bonds are the obligations 
of nations, states, counties, townships and municipalities. 
These bonds are issued to obtain funds for war, public 
improvements or for other public purposes. The 
security of national and state bonds is the faith and 
credit of the issuing government; in case of default in 
the payment of principal or interest, the creditor has no 
right to sue. In case of county, township and munic- 
ipal bonds, however, the creditor, in case of default, has 
the right to sue and can obtain judgment against the 
debtor. These public corporations are regularly or- 
ganized by the state, and the state holds them to rigid 
account for their obhgations. Ko property, even in 
these cases, is specifically pledged to secure the loans. 

224. The investor. — Long term obligations are pur- 
chased by a class of lenders known as investors. The 
investor is either an individual, a firm or corporation. 
The object of the investor in lending money for a long 
period is to receive an assured and stable income during 
that period, and if he can be sure of his income, he does 
not care for the repayment of the principal. In case 
he requires, for other purposes, the money which he has 
expended in the purchase of a long term obligation, he 
can, without difficulty, find some other investor who will 
purchase this obligation from him and can thus obtain 



278 ECONOMICS 

a return of the money invested. The largest investors 
in the United States are the savings banks and insurance 
companies. These receive the savings of milHons of 
people, giving in return either a small rate of interest 
with a promise to return the principal, or, in the case 
of insurance companies, giving a guarantee that, in con- 
sideration of certain regular payments by the holder of 
the guarantee, the company will pay him, his heirs or 
assigns a stipulated sum in the event of death, fire, ship- 
wreck, theft or other contingencies. Both savings 
banks and insurance companies lend most of the money 
placed in their hands to corporations and municipalities. 
Most of their purchases are of bonds. They also invest 
largely in real estate mortgages. These purchases are 
made at prices which will return more than the amount 
which they must pay, either as interest or as a return of 
principal or in satisfaction of loans resulting from in- 
surance risks. 

225. Rates of interest on loans. — Corresponding to 
these various loans, we have a variety of rates of interest. 
Call loans in New York, for example, secured by 
marketable stocks or bonds, have been made at as low a 
rate as 1 per cent; short time mercantile loans with an 
endorser usually bring from 3l/> to 5 per cent; loans 
on the security of farm mortgages 5 and 6 per cent ; the 
best class of municipal bonds sy^ to 4 per cent ; railroad 
bonds 3I/2 to 4% per cent ; bonds of manufacturing and 
mining companies 5 to 6 per cent; loans on improved 
city real estate 4 to 5 per cent; and government bonds 
1% to 2l/> per cent. 

The rate of interest paid by the corporation on notes 
sold to the investor depends, not on tlie rate named in 
the instrimient, but on the price obtained. For ex- 
ample, 4 per cent bonds may be so desirable, in the 



INTEREST 279 

opinion of the investor, as to command a price of 110, 
in which case the corporation would be borrowing at less 
than 4 per cent because, while it gave to the bond buyer, 
who is the lender, a promise to pay him $40 a year for 
twenty years and $1,000, the amount of the original 
loan, at the end of that period, it receives $1,100 for the 
promise. The investor is buying an income of $40 a 
year when he buys a 4 per cent bond. According to his 
opinion of the security of the income, and the certainty 
that his principal will be returned to him, will be the 
price which he will pay for this income. He may pay 
$1,100 for $40 a year, or he may not pay more than $800 
for the same income, plus the right to receive back the 
amount of his loan at the date of maturity. 

226. Causes determining the rate of interest, — Upon 
what does the present price of promises to pay money 
in the future depend? It depends upon the supply 
of promises to pay money of a given class, compared 
with the demand for bonds or notes of that class. All 
funds in the present are of equal value to the bor- 
rower, but all promises to pay money at a future time 
are not equally esteemed by the lender. One thousand 
dollars is the same to the farmer in Western Kansas who 
offers a mortgage on his semi-arid land, as it is to the 
government of the United States, which offers to the 
lender the best security in the world, but the farmer's 
promise to pay is not esteemed as highly as that of the 
government. 

The various classes of promises to pay money at a 
future time may be arranged in a descending series 
according to their reputation and esteem among in- 
vestors. At the top stand government bonds, which 
bear the lowest rates of interest; then come call loans, 
tlien short time commercial loans, following in order 



280 ECONOMICS 

come municipal bonds, railroad bonds, bonds of public 
service corporations, sucb as gas and electric ligliting 
companies; farm mortgages, industrial bonds and 
mining bonds. This list includes most of the loans with 
which business men are familiar. As we come down in 
the scale, the demand for loans weakens. A smaller 
amount of money is offered for these bonds. In order 
to sell them, their price must be fixed at a moderate 
figure and their rates of interest raised. The lower the 
price at which the promise to pay a given sum of 
money in the future can be sold, the higher is the rate of 
interest on the loan which the sale of a promise repre- 
sents. The rate of interest is, therefore, fixed in the 
same way as are the prices of commodities, by a com- 
parison of the supply with the demand. As the supply 
of a given class of loans increases, assuming that the 
demand remains stationary, the rate of interest will rise. 
On the other hand, the supply of United States govern- 
ment bonds is almost stationary and the demand has 
been increasing for a number of years; as a result the 
rate of interest on government bonds has been decreas- 
ing for many years. Says Professor Bullock: 

The payment of interest for a loan of capital is not explained 
by simply showing that capital serves to increase production, 
to improve the quality of the product, and to secure products 
that would be unattainable otherwise. If men would bo willing, 
without receiving interest, to accumulate enough capital to carry 
on the business of the world, then no one could secure interest. 
But this is somethhig that cannot be expected. If a person 
has .$1,000, he can expend it for consumers' goods that are 
available immediately. If he invests it in capital, he can secure 
a return only after some time has elapsed. When he invests 
$1,000 in productive capital, he converts a present available 
income into such a form that it is available only in the future. 



INTEREST 281 

Now, persons will not exchange a present income of $1,000 
for a future income of only $1,000, This is for two principal 
reasons: First, the future is always more or less uncertain, 
and "a bird in the hand is worth two in the bush." Second, even 
when the uncertainty and risk of the future are reduced to a 
minimum, most persons underestimate or undervalue future 
pleasures and pains. But many people are willing to invest 
$1,000 of income in capital so that it will be unavailable for a 
year, in return for $1,050 at the end of that period. The $50 
premium would be interest in this case. It would be a premium 
added to the principal of the loan, available only at the end of 
the year, in order to make it equivalent to a present income of 
$1,000. Interest is paid, therefore, as a premium to equalize 
future goods or future income with present goods or income, in 
the estimation of possible investors. Capital formation implies 
a willingness to invest present income in producers' goods that 
are available only in the future. Interest is the inducement 
necessary to insure the formation of enough capital to meet the 
needs of business. 

Capital may be furnished by three classes of persons. First, 
it may come from rich persons with large incomes, who can 
easily save large amounts of income and invest them in capital. 
Second, it may be supplied by persons of moderate means who 
wish to provide for the future, and would do so even at very 
low rates of interest. Both of these classes of investors do not 
require large premiums in order to induce them to convert part 
of their present incomes into capital. In the third place, we 
have marginal investors, who will furnish more or less capital 
according to the inducements offered for its investment. These 
may be wealthy persons, or may be people of moderate means, 
who would save and invest a portion of their incomes even at low 
rates of interest. But they "will save more, and furnish more 
capital, if the premium offered for investments is high. 

The demand for productive capital comes from all the indus- 
tries that are needed to meet the wants of the society. The 
demand will be large in proportion to the energy and enterprise 
of the population in all branches of economic activity. In the 



282 ECONOMICS 

second place, the demand will be stimulated by the natural oppor- 
tunities offered for favorable investments. Both of these causes 
have made the demand for capital very active in the United 
States, 

The rate of interest is really the rate of annual income that 
will equalize future income with present in the minds of those 
persons who furnish the marginal portion of the supply of capi- 
tal needed to meet the demands of the business of a society. 
In other words, we have merely another case of the equalization 
of the supply and the demand through changes in price — in this 
case "price" meaning the premium offered for future goods 
or income. Prices of commodities must be high enough to en- 
able the marginal investors of capital to secure a premium, a 
rate of interest, that will induce them to furnish the amount of 
capital required. 

227. Bases of classification of loans. — There are 
several causes which explain these differences in the 
desirability of various classes of loans. First and most 
important is the difference in security. Double-name 
paper is better than single-name paper because of the 
double responsibility which the endorsement gives. 
Double-name paper secured by collateral is still better 
because of the additional propert^^ securing it. The 
bonds of a large city are usually much safer than the 
bonds of a small town. The bonds of a railroad com- 
pany which earns $5,000,000 more than the amount re- 
quired to pay its interest charges are more desirable 
than the bonds of a company that only earns $500,000 
above its interest charges. A mortgage on an Okla- 
homa farm is usually regarded as less secure than an 
Iowa farm mortgage. 

The second reason for valuing some loans higher than 
otliers is the different esteem attaching to different 
loans altogether aside from the security which they 



INTEREST i283 

cany. Government bonds, therefore, appeal to many 
persons who have no confidence in raUroad first 
mortgage bonds, although the bonds of some rail- 
road companies are fully as secure as the bonds 
of the United States government. In fact, for a 
considerable period of our history, the bonds of the 
Pennsylvania Railroad Company were more secure — 
since they were payable in gold — than the bonds of the 
United States government, which were payable in 
dollars, the definition of the dollar until 1900 being 
somewhat uncertain. Railroad bonds, in turn, are 
familiar to more people than are mining bonds and the 
percentage of loss in railroad investments is very much 
less than in mining investments. Railroad bonds are, 
therefore, in the greater demand. Notes secured by 
real estate mortgages are popular among the ultra con- 
servative investors who wish to have security for their 
money any time they desire. 

In general, however, it will be found that the investor 
has established the correct order of security in the rank 
to which he assigns different bonds. The bonds of 
some governments, such as Venezuela or Colombia, it is 
true, may be less secure than the bonds of some mining 
companies, such as the Reading Coal and Iron Company, 
but, on the average, the percentage of loss which the 
investor has sustained by purchasing government bonds 
is very small compared with the losses incurred by those 
who have purchased the bonds of mining companies. 
The gradation of investments upon which depends the 
amount of money seeking investment in each class, is 
based therefore directly upon the difference in security 
as between the different classes. 

228. Changes in interest rates. — We have finally to 
discuss the differences in the rates of interest on given 



284 ECONOMICS 

loans at different times. This question can best be 
considered in relation to bank loans. When the country 
is prosperous and business men generally are making 
money, the demand for loan funds is strong and the 
supply of promises to pay money is large. At such 
periods, when prices are rising, every one is anxious 
to get hold of funds in order to purchase production 
goods and hire labor and engage in or enlarge produc- 
tion. The purchaser of pig iron, for example, sees that 
the price of his product is advancing. He knows that 
if he can buy material and hire labor he can buy the 
iron at $14 per ton and sell it for $22 to $25 per ton. 
JNIost producers, when prices are rising, are in the same 
position. Merchants see a chance in the general pros- 
perity of the wage earners and the farmers to enlarge 
their sales if they can increase their stock. Every 
business man endeavors at such a time, therefore, to 
procure ready money by selling his promise to pay 
money in the future. The more anxious he is to obtain 
money doAvn, the larger the profit he expects from the 
employment of the funds, the lower is the price at 
which he will sell his promise to pay; in other words, 
the higher is the rate of interest which he will pay the 
lender. At such periods, tlie banks rapidly increase 
their loans and their deposits, and their profits are very 
large. 

We have seen that the necessity of keeping a definite 
percentage or cash reserve fixes a limit beyond which, 
in the issue of their promises to pay, banks may not go. 
The result is that within a short time after prices have 
begun to advance, the demand for loan funds increases 
more rapidly than the supply, and the rates of interest 
rise. The furtlier this movement is continued, tlie more 
anxious arc borrowers to obtain ready money, and the 



INTEREST 285 

smaller is the margin within which the banks can expand 
their credit to sell to borrowers. 

229. Limitations to the expansion of hank credit. — 
This condition of rising prices and rising interest rates 
after a longer or shorter period, and after many fluctua- 
tions of prices and interest rates, is finally reversed, and 
prices and interest begin to fall. The banks finally 
reach a point where they cannot extend their credit 
further. Business men borrow for two reasons; either 
to buy or to keep from selling. When, therefore, the 
banks refuse to extend additional credit because they 
cannot otherwise keep within the provisions of the law 
which requires them to maintain at all times a certain 
percentage of cash reserve against their demand liabili- 
ties, a certain amount of the demand for commodities 
is withdrawn, those business men who have been carry- 
ing large stocks of goods or securities on borrowed 
money in anticipation of a rise in price, are required to 
repay some of their loans. The demand for commodi- 
ties and securities as a result of the curtailment of bank 
credit is, therefore, decreased, and the supply of com- 
modities and securities enlarged. As a result, prices 
fall. Falling prices reduce profits ; business men curtail 
their operations, and in time the rate of interest, which 
was high during a period of advancing prices, falls to 
low figures and remains on a low level as a result of 
the decreased demand for loan funds, until prosperity 
returns and prices again move upward. 

We may say, therefore, that the rate of interest on 
bank loans moves with the prices of commodities and 
securities, rising as they rise and falling as they fall. 
The same explanation applies to fluctuations in the 
rates of interest on other classes of loans. These are 
given in detail in the volume on Investment and 
Speculation. 



CHAPTER VIII 

PROFITS 

230. — How profits are calculated. — The final share in 
distribution is called profits. The operating profits of 
any business may be calculated by the following for- 
mula: 

(Gross receipts) — [(wages and cost of materials) -[-(depre- 
ciation -j- repairs -|- interest -f- taxes)] = profits. 

In the case that we have under observation, the Phila- 
delphia and Reading Coal and Iron Company, out of 
$35,733,652.8.5 resulting from sales and other sources of 
income the profits amounted to only $171,575.65. 

It is evident that the profits of business are much 
smaller than is commonly supposed. After a manu- 
facturer pays his wages and supply bills, lays aside 10 
per cent of the cost of his plant to offset its deterioration, 
pays his interest, allows interest on his own money in- 
vested in the business, and allows himself finally a proper 
compensation for his own services, he is extremely 
fortunate if anything remains in the way of profits. 

231. The farmer s profits. — A large amount of what 
is commonly termed profits should be included under 
some of these categories. A farmer invests $5,000 in 
a farm of one hundred acres. He hires one hand at" 
$200 per year and board; he pays $250 for farm and 
Iiouse supplies during the year; he pays $50 taxes and 
$100 for other expenses, making his total expenses $600. 
He sells his crops, cattle and hogs for $1,200. He 
believes, and properly beheves, that he has done very 

286 



PROFITS 287 

well on the year's work, for he has $600 clear in bank, 
but can he show any profit? 

He must first allow for interest on his $5,000 at 5 
per cent, or $250. Then his property has depreciated 
to some extent during the year; his barn, for example, 
is one year nearer to the time when it must be painted 
and re-shingled, the same may be said of his house 
and other buildings; his machinery is not so good as 
it was at the first of the year; some of his fields will 
need the application of fertilizer. To offset his ex- 
penses, he may have some colts and calves which may 
have increased in value during the year, but when every 
allowance has been made, a charge of 2^^ per cent for 
depreciation on the cost of his plant is no more than 
sufficient to offset its depreciation in value. Deprecia- 
tion, then, counts for $125 more, leaving $225 remain- 
ing. Most farmers would consider this as their profit, 
but this assumption is incorrect. An allowance must 
be made for his labor on the farm, and the labor of his 
wife in the garden and dairy. Surely he is worth twice 
as much as he pays his hired man. Allowing him $400 
as wages and adding the cost of his family's living 
during the year to the $225 remaining, after his in- 
terest and depreciation have been paid, and taking no 
account of his wife's labor, his receipts will nearly bal- 
ance his expenditures, and he will find that no profit 
has been earned. 

This case is exceptional only in regard to the amount 
of money that the farmer has on hand at the end of 
the year. Few farmers can show such an amount clear 
in the bank. The amount of farm profits, as distinct 
from wages and interest, is surprisingly small. After 
a series of years, taking good and bad seasons together, 
profits in agriculture have been small. 



S88 ECONOMICS 

232. Manufacturing and railroad profits. — It is the 
same in manufacturing profits. The depreciation 
charges should here never be less than 10 or 15 per 
cent. The cost of wages and supplies is proportionately 
higher and the profits on the average in any of the 
manufacturing businesses are small. Even the rail- 
roads, which are commonly supposed, as we have seen, 
to be among the most profitable of industries, show a 
small actual profit on the investment. The total gross 
earnings of American railways during the year 1910 
were $2,750,000,000. Out of this the expense of opera- 
tion, including wages, supplies and taxes, amounted to 
$1,822,000,000; interest and rentals $567,853,000; and 
dividends $283,411,000. There remained only 10 per 
cent of these gross earnings available as profits, and 
when we consider that the stock on which these divi- 
dends were paid had been bought, much of it, at high 
prices by the owners and represents their investments, 
and after we deduct the proper allowance for interest 
on this investment, it is safe to say that railway com- 
panies show very small profits. In fact, manj^ com- 
panies, depreciation being considered, are running be- 
hind. 

233. Profits difficult to make. — Furthermore, in es- 
timating the profits of business, no account is taken of 
the losses. It is a well known fact that 90 per cent of i 
all men who enter business fail at some time in their 
business career. Tlie majority of the large corpora- 
tions in the United States have been at some time bank- 
rupt. If the losses of business could be averaged j 
against the profits, it would clearly appear that the j 
average business man is fortunate if he secures fair j 
wages of superintendence and a moderate return on his 
capital investment. 

Particularly are profits difficult to make under con- 



PROFITS 289 

ditions of competition. Competition implies the sale 
of the same commodity by independent producers to 
the same buyers. Each seller tries to get as high a 
price as he can. In our discussion of prices, we saw 
that he always keeps in mind the cost of production 
and that he will not, unless forced by necessity, go below 
this figure. On the other hand, it must be remembered 
tliat he will sell his goods below the cost of production 
rather than let them remain idle, or allow his plant to 
run at less than its full capacity. 

234. Effect of high /prices. — Suppose, for example, 
that pig iron costs $14 per ton to produce, including in 
the cost of production the cost of material, wages, in- 
terest, depreciation and taxes. As long as the demand 
for iron is sufficient to take all the amount produced at 
the price of $20 per ton, there is a very large profit 
in its production, but this profit encourages the pro- 
ducers to extend their works. This attracts others into 
the industry. The supply of iron increases, and in order 
to sell, prices must be lowered. The price may fall to 
$19, to $17, to $16 and even to $15 before the mills 
which are the most expensive to operate will close or 
even reduce their production. Even then, the price may 
go on falling, if the other mills, whose cost of produc- 
tion has not yet been reached, will make up the defi- 
ciency and maintain the supply. The decline in price 
will continue until the supply is reduced. If the de- 
mand is sustained, the curtaihnent of supply will cause 
prices to rise again, until one mill after another is 
started, but, save in exceptional circumstances, the price 
will not go much above cost at the poorest mills, and 
may even remain below that figure for long periods. 
No producer will run his mills when he is not earning 
expenses. In this estimate of expenses, however, he 

1—19 



290 ECONOMICS 

considers, as a rule, merely the interest which he has 
to pay, and his other outgoings for materials and wages. 
He will, in case of necessity, disregard altogether the 
return on the money which he has invested on his own 
account, and in extreme cases, he will even sell at prices 
which do not represent more than a part of the interest 
charges on each unit of his output. In some cases he 
is likely to conclude that it is better to earn a balance 
on his fixed charges and keep his mill going than not 
to earn any of them and close it down. If his mill is 
closed, interest goes on just the same as though it were 
open, his working force is broken up and his customers 
are lost, and his business is in danger of ruin. The 
producer, unless absolutely forced to suspend, will, 
therefore, continue to operate his plant so long as the 
returns from sales exceed the amount paid for wages, 
materials and repairs. 

235. How profits are made. — Although it must be 
conceded that profits are difficult to earn, we know, 
nevertheless, that enormous profits have been received, 
a fact which is testified to by the large fortunes whicli 
have been made by producers. There is one man in the 
United States whose fortune is said to be $500,000,000. 
There are a number of people whose fortunes reach 
from $20,000,000 to $50,000,000. There are over two 
thousand individuals in the United States whose for- 
tunes consist of $1,000,000. These large accumulations 
of wealth have, for the most part, been accumulated 
out of the profits of industry. How then have these 
profits been made? We may distinguish five sources 
of profits: (1) Appreciation of land or other natural 
resources; (2) superior ability; (3) extraordinary and 
abnormal demand for the product; (4) speculation; (5) 
monopoly. 



PROFITS 291 

236. Appreciation of property. — Many of the great 
fortunes of America have been the result of the shrewd 
buying of some natural resource. The immense wealth 
of the Girard estate is mainly due to the appreciation 
in the value of the anthracite coal lands, purchased at 
low prices one hundred years ago by Stephen Girard. 
The wealth of the Astor family came from persistent 
buying, through four generations, of New York real 
estate, which has steadily grown in value. A large part 
of the Hill fortune came from the far-sighted policy 
of Mr. James Hill in buying iron ore lands in Minnesota. 
These instances could be indefinitely multiplied. Nearly 
every great American fortune has been increased, if not 
entirely created, by the growth in value of the various 
products which the possessors of these fortunes have 
had the foresight to purchase when their values were 
low. 

237. Superior ability as a source of profits. — In the 
great majority of cases, the large profits of industry 
have been the result of superior ability. We have seen 
that most business men do not make profits; a few men 
do make them. The primary reason for this distinction 
is that the few are more liberally endowed with brains 
than the many. They understand their business better. 
They are better able to take advantage of opportunities 
for profits as these are presented. 

The Carnegie Steel Company is the most conspicuous 
illustration of manufacturing success and enormous 
profits. These profits are largely the results of brains. 
This company started with a small forge and machine 
shop nearly forty years ago, and its stock and bonds 
were sold in 1901 for nearly $500,000,000, practically 
all of which represents the accumulation of profits. 
These profits were earned because of superior ability 



292 ECONOMICS 

displayed in the management of the husiness. Their 
abihty was displayed in the following forms: (1) in 
re-investing the greater part of the earnings of the bus- 
iness in enlarging the plant; (2) in purchasing the best 
machinery no matter what it cost, and in discarding any 
appliance for which a better substitute could be had so 
as to reduce costs of production to the lowest possible 
figures; (3) in giving superintendents and foremen an 
interest in the business so as to insure their loyalty and 
zeal; (4) in producing their own raw material so that 
when the price of steel rose they had no profits to pay 
to the iron and coal miners; (5) in equipping their 
business to run at lowest cost by operating their plants 
at full capacity, crushing many of their weaker com- 
petitors and capturing their market. The writer has 
elsewhere described the advantages of the Carnegie Steel 
Company as follows : ^ 

238. Advantages of the Carnegie Steel Company. — 
"The Carnegie Steel Company owned the most com- 
plete, the best-equipped, and the best-managed steel plant 
in the United States. The perfection of its equipment 
in point of independent supplies of materials and trans- 
portation service has been already described. No one 
of its rivals was worthy to be compared with it in point 
of self-sufficiency of production. This equipment sup- 
plied ore and fuel to the mills which were grouped so 
closely about Pittsburgh that the president of the com- 
pany was able to visit some department of each mill 
on successive days. The Edgar Thompson furnaces 
and mills were at Bessemer, two miles from Pittsburgh; 
the Duquesne furnaces and mills, four miles from Pitts- 
burgh; and the Homestead Steel AVorks, one mile from 
the city. Besides these larger works, there were located 

1 E. S. Meade, " Trust Finance," p. 207. 



PROFITS 293 

In, or immediately adjoining the city, the upper and 
lower Union Mills, the Carrie and Lucy Furnaces, and 
the Howard Axle Works. All these plants were con- 
nected by the Union Railway, with thirty-nine miles 
of track, which in turn connected with the Pittsburgh, 
Bessemer and Lake Erie Railroad to the north. This 
arrangement of mines, coke ovens, and mills was the 
most favorable that could have been devised for econom- 
ical production. 

"The riiills of the Carnegie Steel Company were con- 
centrated at the point of largest present advantage, 
where materials could be most easily assembled, and 
from which the largest markets could be most easily 
reached. It was this fact of concentration even more 
than their superior facilities which gave the Carnegie 
Steel Company their most pronounced advantage. 

239. Superior equipment in machinery and men. — 
"The advantages of the Carnegie Company did not 
stop here. Their mechanical equipment was superior 
to that of any other mills, and their business was the best 
managed of any in the country. The superior equip- 
ment of the Carnegie works was the result of a policy 
of large expenditure upon betterments persistently pur- 
sued for many years. "Every new process and every 
new machine which would in any way increase the effi- 
ciency, reduce the cost, and improve the product of the 
Carnegie Company has been adopted, until this great 
concern has raised the physical condition of its mills 
to a point which is unsurpassed." Dividends had never 
been considered by the management. Improvement 
had been the one thing thought of. During the years 
1898 and 1899, the Carnegie Company expended out 
of earnings upon new construction and betterments no 
less a sum than $20,000,000. 



294 ECONOMICS 

"The increased earning power here represented was 
clear gain. No deductions had to be made for interest 
payments. The poMcy of the Carnegie Company was 
purely industrial. Financial considerations had little 
weight. Its shares w^re never in the market. The 
greater part of its profits was each year invested in 
the plant. As Mr. Carnegie remarked, he and his part- 
ners knew little about the manufacture of stocks and 
bonds. They were only conversant with the manufac- 
ture of steel. 

"The management of the Carnegie Steel Company 
represented the acme of productive efficiency. Every 
officer had risen from the ranks by dint of compelling 
merit. Every head of a department had an interest in 
the business apart from his salary. Trade unionism 
had been banished from the mills in 1892, and the work- 
men were spurred on by high wages and the promise of 
advancement. No visitor to the Carnegie mills could 
fail to be impressed with the intensity of the effort and 
the strained attention evident in every department. 
None but the strongest could stand the terrific pace. 
Breakdowns were frequent at thirty-five, men were old 
at forty-five. The famous 'iron-clad agreement,' it has 
been claimed, was designed to dispense peaceably with 
partners who had outlived their usefulness. Not only 
was money lavishly spent on salaries and wages, but 
large sums were paid for information. The result of 
these advantages and this policy appeared in the revela- 
tions of the Carnegie-Frick controversy, when the 
plaintiff claimed that the total profits of the company 
for 1898-99 exceeded $70,000,000." 

Every one of the competitors of the Carnegie Steel 
Company could have done these things if they had known 
how, in which case there would have been small profits 



PROFITS 295 

for every one, and prices would have been much lower 
than they actually were. Because the Carnegie Steel 
Company for many years employed the best brains in 
the steel industry, they were able to produce at lower 
cost than their competitors, and since they did not sup- 
ply the entire demand of the market, the price remained 
at such a figure that they kept their plants at work. 
This price, however, left the Carnegie Company a large 
margin of profit which as we have seen was invested 
in the business. Similar illustrations of profits received 
from superior brains are furnished by every business. 
The man with superior ability may sell at the same price 
as his competitors, but he buys cheaper and sells in 
larger quantities. He recognizes that the highest paid 
labor is the cheapest, that liberal advertising pays, and 
that up-to-date machinery is a necessity. He is alert 
to take advantage of every opportunity. As a result 
he succeeds. 

It is useless to decry the great American fortunes as 
the result of railway discrimination, extortion, oppres- 
sion of labor, monopoly, etc., etc. They are, with hardly 
an exception, the result of superior ability. We may 
criticise some of the methods, for example, of Mr. 
Rockefeller and his Standard Oil associates, in making 
large profits out of railway rebates, but we cannot deny 
that at the outset each one of Mr. Rockefeller's com- 
petitors had the same opportunity to take this advantage 
of the railroads that he had, nor that his remarkable 
success shows conclusively his greater skill at the game 
of business. 

240. Extraordinary demand for the product a source 
of profit. — Profits are made by nearly all producers 
during seasons of extraordinary demand, which come 
at intervals to every industry. The hard coal strike dur- 



296 ECONOMICS 

ing 1902 illustrated this, ^Yhen the demand for bitumi- 
nous coal resulted in large profits to the soft coal opera- 
tors. The iron and steel manufacturers made large 
profits during 1906-1907. The United States Steel 
Corporation in 1906 earned 20 per cent of its inflated 
common stock. As a result of large purchases of equip- 
ment by railways during that period the manufacturers 
of railway equipment made large profits. When the 
short crop of wheat in Europe coincides with the full 
crop here, American wheat growers prosper. 

As we saw in a previous section, costs of production 
do not change as rapidly as prices, and the result is that 
occasionally every producer has an opportunity to make 
large profits. If he invests these profits in his own 
business or some other profitable business he will im- 
prove his financial position. If, however, as the ma- 
jority of business men do, he considers these profits as 
available for his personal expenditures, or in cases of 
corporations, if their directors distribute most of their 
profits in dividends to stockholders, assuming that they 
represent a permanent income, instead of viewing them 
in their true light, as occasional and temporary gains, 
neither the individual nor the corporation will be bene- 
fited. 

241. Speculation as a source of profits. — The third 
method by which profits are made is by speculation. By 
this term we mean the buying of commodities, or stocks, 
or land with the expectation of making a profit from the 
increase in its value. A large part, perhaps the greater 
part, of American speculation is carried on with money 
borrowed from the banks on the securitj'^ of the things 
purchased. This fact enables a speculator with $10,000 
of his own to purchase one thousand shares of stock sell- 
ing at $100 per share. He jjuts in his $10,000, and 



PROFITS 297 

his broker borrows for him $90,000 more, giving as 
security the stock purchased. If the stock advances 
$10 per share, the speculator doubles his money. The 
same method is employed in grain, coffee or cotton 
operations, and also in speculating in real estate. 

There are numerous instances of great profits be- 
ing made in speculation. For example, the foundation 
of P. D. Armour's fortune was made by speculation in 
pork. The foundation of the Rockefeller fortune was 
laid by speculation in oil lands. To perhaps ninety- 
nine men out of every hundred, speculation, aside from 
the risks which every one must take in his own busi- 
ness, is sure, if persisted in, to result in heavy losses. 
The losses in speculation are far greater than the 
gains. It is true that inside interests in many large 
corporations having advance information as to dividend 
charges or consolidations, favorable or unfavorable to 
competition, may, with perfect safety, buy or sell the 
stock affected and make large profits. In the re-cap- 
italization of enterprises for sale to the public in the 
form of stocks and bonds, large gains are also made 
by the syndicate which financed the trusts. The United 
States Steel Corporation syndicate, for example, is re- 
ported to have cleared 100 per cent on an investment of 
$25,000,000. Even in the stock market, where the risks 
of loss are commensurate with the chances of profit, 
the great fortunes of Gould, Keene, Widener, and many 
other wealthy men, show that speculation is often the 
road to wealth. These men speculated, however, from 
inside knowledge. They were in a position to know 
what would happen to the companies in whose stocks 
they speculated in the way of dividend payments or 
consolidations, and on the basis of this certain knowledge 
they could not fail to profit in most of their operations. 



298 ECONOMICS 

Large fortunes have also been made out of political 
influence, which is frequently purchased, and as a result 
of which valuable franchises and privileges have been 
obtained for a nominal consideration. These methods, 
however, while available to the few, are unavailable to 
the majority of producers. The number of men who 
have been ruined by taking chances for large profits, 
in other words, by speculation, is enormously greater 
than those who have profited by this method. 

242. Monopoly as a source of profits. — The fourth 
method by which profits have been made is by obtaining 
a position of monopoly advantage. Monopoly has al- 
ready been defined as control of supply so that demand 
has a larger influence upon prices than under competi- 
tion. There can be no question that if a monopoly 
position can be obtained it is the surest and safest way 
to earn large profits, and these profits will be received 
in good years as well as in bad years. 

The first form of monopoly is the monopoly of ability. 
If a producer takes care that he is the best posted man 
on his line of trade, and furthermore, that his assistants 
are second only to himself in their information concern- 
ing his business; if he ensures their enthusiastic fidelity 
and interest by liberal salaries and by giving them a 
sliare of the profits in addition; if he ensures the best 
M'ork by paying the best wages, he is in a fair way to 
secure the monopoly of brains in his business, and to 
profit accordingly. 

JNIonopolj profits have never been looked upon with favor in 
the United States. Even the suspicion that they were beings 
enjoyed has sufficed often to disturb tlie conditions which made 
them possible, cither because consumers have combined to boy- 
cott the monopolized good or because the governincnt has hitcr- 
fered. Under such circumstances it has been but natural for 



PROFITS 299 

monopolists to devise numerous expedients for concealing their 
real earnings. 

The most common expedient of all for concealing profits is 
the practice of inflating the capitalization of the corporation. 
Where a business is organized by shrewd men who foresee its 
monopolistic possibilities, it is usual to start with a grossly 
inflated capitalization. In the railway business, for example, it 
has not been unusual to secure all of the capital required by the 
sale of bonds and to distribute the stock as a pure bonus. In- 
dustrial combinations as organized in the United States accom- 
plish the same result by putting out preferred stock equivalent 
to the actual capital invested in the business and an equal or 
even larger amount of common stock as a bonus. In these and 
other ways the nominal capital of an enterprise may be made 
from the first, two, three or even five or ten times the amount 
actually invested in it. Such an arrangement permits directors 
to distribute very large profits as dividends on the nominal capital 
without exceeding the ordinary rate of interest. 

It often happens, even when large monopoly earnings are an- 
ticipated, that the nominal capitalization is not made large 
enough to conceal them. In such cases, and in the more usual 
cases in which actual and nominal capitalization start together, 
the practice of "watering" stock to conceal excessive earnings 
is frequently resorted to. This consists simply in issuing new 
stock for which no equivalent Investment Is required. It may 
be accomplished by means of a stock dividend, each shareholder 
being given an amount of new stock proportional to his original 
holding ; or by the issue of new stock for subscription at a nomi- 
nal price, subscriptions being open only to shareholders, direc- 
tors or other favored investors. By these means the nominal 
capitalization may be expanded to keep pace with earnings and 
to permit the distribution of the latter without any apparent 
increase in the dividend rate. — H. R. Seager, " Economics : 
Briefer Course," pp. 146-7. 

,j 243. Monopoly of large industries. — The second kind 
of monopoly is the monopoly of large industries. This 



300 ECONOMICS 

is illustrated by the recent combinations of industries, 
which are called trusts, which brought together a large 
number of industries under a single control. Other 
examples are furnished b}^ any business in which a great 
amount of capital has been intelligently invested, so that 
it has obtained the advantage of a large scale of produc- 
tion. The advantages of the large producer are con- 
siderable. He gets the best men and best equipment. 
The large producer buys cheaper, and he sells at less 
exj^ense than his small competitors. He makes a more 
efficient disposition of the bj'^-products of his business. 
He can spend more money in improvements. He does 
more business as compared with his competitors and, 
therefore, at lower cost. The cost of production to the 
large producer is not merely lower than to his smaller 
competitors, but because his prices are controlled, the 
average price obtained is higher, and under competition 
there are not so many violent fluctuations. JNIonopoly 
prices do not rise so high as under competition and do 
not fall so low. The prices are, therefore, higher than 
under competitive conditions. Large business organiza- 
tions, it is expected, will eventually control most branches 
of production in the United States. These organiza- 
tions, either because of their size, or agreements between 
them, can be more easily effected, as they are few in 
n imber, have many of the advantages of monopoly. 

244. Franchises and patents. — The third form of 
monopoly is the legal niionopoly of a franchise or a 
patent. A franchise is the right to use public property 
for business purposes, as, for example, to use the streets 
of a city for street railway tracks. These grants, being 
for most purposes exclusive, are in large cities enor- 
mously profitable since they have usually been given 
w illiout compensation. One street railway company in 



PROFITS 301 

Philadelphia, for exami)le, pays 72 per cent dividends 
on its stock and others pay from 25 to 40 per cent. In 
recent years, however, there has been evident a growing 
disposition on the part of the public to exact suitable 
compensation from the holders of franchises, and to 
make these grants only for short periods, thus greatly 
limiting the profits which can be inade from this source. 
A patent is an exclusive right granted by the United 
States government to the inventor of a useful machine 
or process, to make and sell his invention for a term of 
seventeen years. Large fortunes have been made from 
patents but the original inventors have made less than 
those who purchased their inventions, and only a small 
percentage of the patents granted prove to be valuable. 
245. Monopoly of quality. — The fourth and last 
form of monopoly is open to every producer. It is 
the monopoly of quality. Many manufacturers are 
thriving and making large amounts of money to-day 
because they are producers of specialties, which are pro- 
tected either by patents or by special knowledge in which, 
therefore, there is no competition, and which they can 
sell at a price which gives a liberal margin of profit. 
The advertising pages of every magazine are full of 
examples of this kind of monopoly. Royal Baking 
Powder, Shredded Wheat Biscuit, the Elgin Watch and 
the Victor Talking Machine are instances in point. 
Enormous fortunes have been made out of this monopoly 
of quality. This form of monopoly is also built up by 
skillful advertising. Every year, in the United States, 
more than one billion dollars is spent in advertising. In 
various ways, there is built up, as a result of this vast 
expenditure, in the minds of the buyer, an association be- 
tween his wants and the article advertised. When he 
thinks of shoes, the names Regal and Douglas are sug- 



302 ECONOMICS 

gested ; of hats, Knox or Stetson ; of collars, the Arrow 
Brand, and so on. This form of monopoly, next to the 
monopoly of a franchise, is the most enduring and the 
most profitable. To an increasing extent producers 
are coming to rely upon advertising to establish their 
business on the enduring foundation of the association 
of ideas. 

Specialization in manufacturing in order to obtain 
such a position of monopoly advantage is open to every 
one. Ceaseless study and constant attention to the pro- 
duction of some one thing, coupled with good business 
judgment, will, in time, place the producer in a position 
of monopoly advantage but his monopoly will be one of 
quality and distinctiveness. If protected by patents and 
backed by advertising, this form of monopoly is likely 
to prove more permanently profitable than any other 
form. 



CHAPTER IX 

TAXATION ^ 

246. Functions of government. — The fourth share in 
distribution, with an examination of which we will con- 
clude Part III of this book, is the share which the state 
takes in taxes. In the accounts of every corporation ap- 
pear payments for this item. Every property holder 
in the United States contributes to the support of the 
state. Furthermore, owing to their purchases of com- 
modities which are taxed by the United States govern- 
ment, it can be said that every man, woman and child in 
the United States pays taxes. 

Before considering the principles which govern the 
assessment of the different kinds of taxes, we must 
ascertain the reason for the payment of taxes. Taxes 
are necessary to provide for the support of the different 
divisions of government. The functions of the govern- 
ment are twofold; first, to secure to each individual the 
enjoj^ment of all the privileges consistent with the en- 
joyment of similar privileges by others; and second, 
to further the welfare of its citizens. 

Under the first heading, we include what are known 
as the negative functions of the government, and under 
the second the positive functions. Examples of the 
negative functions of the government are the protection 
of society against criminals, the establishment and en- 
forcement of regulations governing the transfer of 
property; the inspection of foods and buildings to 
ensure purity and safety; the isolation of cases of in- 

303 



304 ECONOMICS 

fectious diseases; the laws regulating the collection of 
debts, and the regulation of railway rates and fares. In 
each of these functions, it will be observed that the gov- 
ernment does no more than to protect the citizen against 
injury and injustice from his fellows. 

The positive functions of government include two 
classes of services, (1) those which the government per- 
forms because it is the government , and whose expenses 
the individual must pay whether he will or not; and (2) 
those services which the government performs as a busi- 
ness corporation, and of which the citizen maj^ avail him- 
self or not as he chooses. Examples of the first class are 
the construction of roads, streets, sewers, the improve- 
ment of rivers and harbors, the coining and issuing of 
money, protection against fire, the care of the sick, poor 
and infirm, and the maintenance of free schools. These 
services are paid for out of the revenue of the state, and 
are rendered gratuitously to the individual who profits 
by them. Examples of the second class of services which 
may be called the industrial services of government, ' 
are the transmission of mails, the furnishing by 
municipalities of light, heat, water and power, the pro- 
vision for education where payment is required, the con- 
duct of savings banks, and the transmission of telegraph 
messages. The payment for these services is made 
volimtarily by the individual to whom the services are 
rendered. These payments are known as fees or prices 
as distinguished from taxes which we have presently to 
define. 

247. Taxes defined. — All the negative functions of 
government, and the first class of positive functions, are 
supported from the proceeds of taxes. A tax may be 
defined as "a general compulsory contribution levied 
upon persons, natural or corporate, under the authority 



TAXATION 305 

of the public power." The most significant feature of 
the tax is its compulsory character. The citizen must 
pay, no matter what may be his individual opinion as to 
the justice of the tax imposed upon him. This com- 
pulsory character of taxation is so generally emphasized 
that most persons lose sight of the fact that, considered 
from another standpoint, the tax is a payment by the 
citizen for numerous and important benefits conferred 
upon him by the state. We have only to contrast what 
our condition would be under a state of anarchy or no- 
government, with what it is under an orderly and well- 
established government, to see that the sacrifices which 
men would make in order to provide a stable government 
far exceed the sacrifice actually involved in the payment 
of taxes. 

248. Basis of taocation. — The basis of taxation is the 
ability of the individual to pay taxes. The government 
needs revenue, and it taxes the individual according to his 
ability to pay, as the easiest method of obtaining the 
funds it requires. It is true, however, that the benefit 
which the individual receives from the activities of the 
state depend upon the amount of property that he 
enjoys, and we would not be incorrect in saying, there- 
fore, that taxes are not only based upon the ability to 
pay, but also upon the benefits derived from the govern- 
ment which is supported by the taxes. 

249. Maxims of taxation. — The maxims of taxation 
are as follows: 

(1) Taxation should be levied according to the re- 
spective ability of the taxpayer. 

(2) Taxes should be certain and not arbitrary. "The 
time of paj^ment, the manner of payment, the quantity 
to be paid ought to be clear and plain to the contributor 
and to every other person." 

1—20 



306 ECONOMICS 

(3) Every tax ought to be levied "at the time or in the 
manner in which it is most hkely to be convenient for 
the contributor to pay." 

(4) The expense of collecting taxes should be as low 
as possible. 

(5) Taxes should above all other things be adequate 
to the needs of government. The worst taxes are 
justified under this maxim by the plea of pubhc 
necessity. ' * 

(6) A tax system should be elastic, so that its yields 
may be increased or diminished as the necessity of the 
government requires. 

(7) Taxation should be levied in such a way so as to 
interfere as little as possible with the industrial activities 
of the nation. 

250. Forms of taxation. — We have next to consider 
the forms of taxation, and to examine the most im- 
portant examples under each form. Taxes may be gen- 
erally divided into direct and indirect taxes. Direct 
taxes are those levied upon the individual who is expected 
ultimately to pay them. Indirect taxes are levied 
either upon commodities or individuals as producers 
in the expectation that the person Avho advances 
the tax, for example, the manufacturer of cigars, 
will be able to shift the burden in whole or in part upon 
others. 

251. Advantages of direct taxation. — The advan- 
tages of direct taxes are as follows: (1) Their yield 
may be more certainly calculated than in the case of in- 
direct taxes, because they will be paid by one person 
upon whom they are levied; and (2) they can be more 
easily and cheaply collected. Their disadvantages are: 
( 1 ) Their unpopularity, since the average individual is 
opposed to the payment of taxes; and (2) the danger of 



TAXATION 307 

fraud and deception in the declaration of the amount of 
property or income upon which the tax is based. 

252. Advantages of indirect taocation. — The advan- 
tages of indirect taxation are : ( 1 ) Because its burden 
is concealed, owing to the fact that it appears in the price 
of commodities, and because the consumer, as we have 
before shown, does not understand in what way prices are 
fixed. Indirect taxes, for example, on sugar and 
tobacco, are paid by the consumer little by little as he 
purchases these commodities, and the burden of payment 
is not perceived. (2) Indirect taxation makes it pos- 
sible to reach the tax-paying capacity of the middle and 
lower classes who have no property, and whose income 
consists of their wages or salaries. Their capacity can- 
not be reached by direct taxation, but they can be made 
to pay indirect taxes on their daily consumption. 

The disadvantages of indirect taxation are : ( 1 ) The 
yield of indirect taxes cannot be accurately calculated, 
in view of the fact that the amount of retail purchases of 
taxed articles is a fluctuating quantity. (2) Indirect 
taxes cost more to collect, owing to the fact that they 
are collected throughout the year, while direct taxes are 
collected within a short time; and furthermore, a large 
corps of officials is necessary in the collection of indirect 
taxes to make sure that dutiable articles do not escape 
the tax. (3) Indirect taxes are objectionable because 
they seriously interfere with industry. Industries whose 
products are taxed must be carried on so as to facili- 
tate, as far as possible, the collection of taxes rather 
than with sole reference to economical production. 

253. General property tax. — Taking up now the 
special forms of direct taxation we have the general 
property tax. ^ The basis of assessment of this tax is the 
real and personal property owned by the taxpayer. 



308 ECONOMICS 

The tax is paid out of the income of the taxpayer and 
forms a hen on his property. In the United States the 
general property tax is usually employed in systems of 
state and local taxation. For state purposes, the tax is 
assessed among the counties according to their respective 
property valuations, and county taxes are usually 
assessed in the same way among the townships. These 
taxes are collected by elected assessors, who ascertain 
"the full cash value of real and personal property," and, 
if necessary, obtain a declaration of the value of his 
property from the taxpayer. 

The objections to the general property tax are as 
follows : ( 1 ) Lack of uniformity of assessment. This 
applies particularly to state taxes, which are assessed, as 
we have seen, upon the counties according to their re- 
spective property valuations. Each county tries to make 
its valuation as low as possible in order to reduce its con- 
tribution to the share of the expenses of the state. (2) 
Lack of unformity in the assessment of different kinds 
of property; real estate and visible property are usually 
assessed at higher rates than stocks, bonds and other 
forms of property which are not visible, and the existence 
of which may be concealed by the taxpayer. It is a well 
known fact that men with large political influence are 
taxed in many places on a lower basis of valuation than 
the average man can obtain. Furthermore, under the 
general property tax, the houses of the poorer class, 
being assessed at their selling valuation, are necessarily 
assessed at a higher rate than the house of the rich, wliich 
as a rule will sell but for a fraction of the money which 
has been invested in tliem. The general property tax 
exempts from taxation all incomes connected with prop- 
erty, as for example, professional salaries. (3) The evil 
of double taxation is general Few states allow any 



TAXATION 309 

deduction upon the property of debtors. The result is 
the debtor is taxed twice, both on what he has, and on 
what he owes. 

The only argument which can be advanced in support 
of the general property tax is that it now occupies the 
field, and that it would be difficult to change it. Some 
of the most radical defects in the administration of the 
taxes can be done away with. Thus it has been found 
that the evils of competitive undervaluation may be 
avoided by allowing the expenses of the state to be paid 
by a tax on one form of property, such as personal prop- 
erty, and the expenses of the locality from the tax on 
real estate. Inequality of assessment as between in- 
dividuals may be remedied by giving publicity to the 
assessment, and by making the assessor appointive 
instead of elective. Even when everything possible has 
been done, however, to improve the administration of the 
general property tax, it still remains a very objectionable 
form of imposition. 

254. Income taoc. — The income tax assesses the tax- 
payer upon the basis of his ability to pay as evidenced 
by his income. Its advantages are: (1) It is based 
directly upon the ability of the taxpayer; (2) it cannot 
be shifted, since it is not levied upon commodities whose 
price can be raised, but upon persons; (3) if the prin- 
ciple of stoppage at the source is adopted, by which is 
meant the collection of the income before it reaches the 
hands of the recipient, as for example, the payment of 
the income by a corporation for its stockholders, evasion 
of the income tax by falsification can be made extremely 
difficult. (4) The income tax reaches income which is 
not connected with corresponding amounts of property. 
(5) Income taxation is more equal than any form of in- 
direct taxation. Indirect taxation unduly burdens the 



310 ECONOMICS 

poorer classes who may consume as large a quantity of 
taxable conunodities as their wealthier neighbors, but 
whose tax -paying ability as based upon their income is 
much smaller. Under the income tax, however, the 
poorer class will pay little or nothing to the state while 
the tax burdens of the wealthy would be barely according 
to their ability. (6) The sixth advantage of the income 
tax is its elasticity. It responds quickly to any change 
in the rate of assessment. 

The objections to the income tax are: (1) the in- 
quisition into the private affairs of the taxpayers which 
it necessitates, and which renders this form of taxation 
very unpopular; (2) the fact that temporarj^ income 
derived from business or professions which terminate 
with the life of the recipients and which are the result of 
their personal exertions are taxed at the same rate as 
incomes from land and property which are permanent 
and which do not depend upon the eiForts of those who 
receive them. 

The income tax is a prominent feature of English 
taxation, having been introduced in 1842. It was em- 
ployed in the United States during the Civil War, along 
with several other kinds of taxes, but it was repealed 
after the war closed. In 1894, an income tax law was 
]:)assed which was to apply only to those incomes in excess 
of $4,000. This law was, however, declared imconsti- 
tutional in 1895 ; in 1913 the constitutionality of an in- 
come tax was reaffirmed by an amendment. 

255. Single tax on land values. — The most prominent 
advocate of the single tax on land values was Henry 
George, and his theory of the single tax is treated in 
his book entitled "Progress and Poverty." This theory 
is based upon definite assumptions which are as follows: 
Capital is but a form of labor, therefore, the returns to 



TAXATION 311 

capital and labor must always tend to equality. To the 
employment of labor and capital land and other natural 
agents are indispensable. This land is of all degrees of 
productiveness, and when found in towns and cities, it is 
of all degrees of advantage of location. Under the 
institutions of private property in land, these natural 
resources are monopolized. The returns to labor are 
measured by the product of labor on the most productive 
lands open to the laborer's free use and occupation. 
The owners of the better grades of land, therefore, can 
exact from the laborer all the surplus product after the 
yield of the lands which are open to free occupation, be- 
cause they can at any time hire labor at a rate of wages 
measured by the return of labor on the poorest land cul- 
tivated for the market. The same reasoning applies 
to the return of capital when employed on the better 
grades of land. It can obtain no higher rate of returns 
than the capital employed on land not yet monopolized. 
All the returns of the better lands above the returns on 
the poorest lands, therefore, go to the landlord. As 
labor and capital increase their efficiency, since they can 
find employment nowhere to better advantage than on 
monopolized lands, the demand for land constantly in- 
creases. The result is that all the gains of civilization 
go to the landlord. All the returns from inventions 
and improvements, and all the returns from increased 
productiveness are absorbed by the owner of the natural 
resources. The consequence is that poverty tends to 
persist in the midst of advancing wealth, and is most 
extreme where wealth is most abundant. This argu- 
ment supplies a fairly accurate statement of the conven- 
tional theory of rent, to which reference has been made 
in our discussion of this subject. 

256. Pf^oposition of the single tax. — In order that 



312 ECONOMICS 

there may be a fair division of the income of society 
the single taxer proposes that rents should be confiscated, 
that all incomes not due to the investment of capital or 
exertion of labor, should be taken over by the state. 
The justice of this proposition is defended on the ground 
that the landlord did not create the value of the land; 
that this was done for him by society at large, and that, 
therefore, society can take over that which it has created. 
This appropriation of rent by the state is to be effected, 
according to the single taxer, by the imposition of a tax 
rent which will rise as returns rise and which will sub- 
stitute the state for the landlord. Other taxes it is pro- 
posed to abolish. It is claimed that the single tax would 
not only provide a revenue sufficient for the requirements 
of government, but that it would also correct existing 
inequalities in distribution by turning over to the owners 
of capital and labor, a large share of the rewards of 
their labor and saving. 

257. Fiscal objections to the single tax. — The ob- 
jections to the single tax may be divided into two classes: 
(1) Fiscal objections, and (2) economic objections. 
The first fiscal objection to the single tax is due to its 
inelasticity. The pecuniary needs of government rise 
and fall. The rents of land and other natural agents do 
not change with the same rapidity. As a consequence 
of this inelasticity, if the single tax were adopted, and 
if the government lived up to its income, as it usually 
does, in some years there would be a large deficit, and 
in other years, a large surplus, a most undesirable con- 
dition of affairs. The second objection is that the single 
tax could not be collected. As applied to ground rents 
in cities there might be no difficulty. A large part of 
the value of agricultural land is, however, due to the 
investment of capital in improvements. It would be 



TAXATION S13 

impossible to separate the returns to capital from the 
returns on "bare lands" and since the single tax pro- 
poses to exempt capital from taxation, this tax cannot 
be collected on farming- land. 

258. Eco7iomic objections to the single tax, — The 
economic objections to the single tax are: (1) poverty 
is rapidly diminishing in every civilized country, which 
contradicts the assumption upon which the single tax 
theory is erected; (2) that wages are paid by an employ- 
ing class as we have seen, and that the larger the amount 
of capital seeking investment, the greater the demand 
for land and labor, which explains the general rise in 
wages all over the world; (3) a large amount of this 
increased demand for labor comes from the landlords 
who do not consume all their own income from rents, 
but who save and invest a large portion of this in pro- 
ducing capital; (4) the single tax oiFers only a partial 
remedy. Land is not the only monopoly, and there 
are other unearned increments besides rent. The aboli- 
tion of one form of monopoly, without attacking an- 
other, is inconsistent. (5) The final objection to the 
single tax is that it strikes at the foundation of present 
economic society by attacking the institution of private 
property. If the landlord is to be deprived of his land, 
the owners of all other forms of property will feel in- 
secure in their holdings. The adoption of the single 
tax would, therefore, be a socialistic measure, and on 
that account objectionable. 

It has been claimed that the tendency of economic progress 
is to cause a decided increase in rents. In agriculture, it is said, 
the law of diminishing returns drives producers constantly to 
cultivate poorer lands. This increases the differential rents se- 
cured from better lands. In the case of town lots, it is urged 
that every increase of population raises rentals in a marked 



314 ECONOMICS 

manner. All such Increases of rents, it is thought, are due 
solely to the growth of society, not to the activity of the par- 
ticular landowners whose rentals are raised. Hence the expres- 
sion "the unearned increment" has been applied to this growth 
of rent produced by social development. 

Those who speak of the unearned increment commonly over- 
look the losses that many landowners suffer. Large sums spent 
in developing city real estate have been entirely lost, as the 
enterprises have often proved failures. Changes in the loca- 
tion of street railways or in the movement of fashion or business 
from one section to another, lower rents in some sections of a 
city nearly as much as they increase them in another. The 
development of facilities for rapid transit tends to decrease the 
demand for city lots for residence purposes. In the case of 
agricultural lands, rents have been lowered repeatedly over large 
sections of country. In England, agricultural rents have been 
lowered greatly by the competition of cheaper wheat, beef, and 
pork produced in the United States. In the eastern portioil of 
this country agricultural rents have been lowered by the opening 
up of the wheat lands of the West. Many farms in New Eng- 
land cannot be rented for enough to pay interest on buildings 
and improvements on the land. If we set off these decreases 
against the increases of rent that have been caused by social 
development, the net unearned increment received by landowners, 
as a class, is very much smaller than is usually represented. 

Only in the case of landowners who own particularly desir- 
able tracts of land can it be claimed that there is a great un- 
earned increment. Some favored situations in the business 
centers of cities, some sites available for docks, for tenninal 
facilities for railroads, etc., have become enonnously valuable, 
so that a large unearned increment has been received. — C. J. 
Bullock, "Introduction to the Study of Economics," pp. 445-6. 

2.59. The inheritance tax. — Inheritance taxes are 
duties imposed upon the succession to property after 
death. This form of taxation is justified on various 
grounds: (1) As a socialistic measure to insure the 



TAXATION 315 

diffusion of wealth; (2) as a form of income tax — a 
tax on "fortuitous income," that is, an income tax not 
collectible during the lifetime of the decedent, and 
paid for by his successors; (3) the inheritance tax is 
easily and cheaply collected and cannot be evaded, for 
it is paid when the estate is administered. 

The principles upon which inheritance taxes are 
levied in various countries are as follows: (1) small 
estates are exempt; (2) collateral inheritances as by 
nephews or cousins are taxed at a higher rate than 
direct inheritance by sons; (3) the principle of 
progression also applies ; in some cases large inheritance 
being often taxed at a higher rate than small; (4) the 
only limitation to the rate of inheritance tax is the 
danger that if the rate is fixed too high, the tax may be 
evaded by giving away of property before his death. 

In the United States at the present time the inher- 
itance tax is enforced in a large number of the states. 
New York, Connecticut, Massachusetts, New Jersey, 
Pennsylvania, Ohio, California and Illinois are the 
most important. This form of taxation has been gen- 
erally employed in the United States, primarily on 
account of the failure of the general property tax 
to reach personal property. 

An unequal distribution of wealth must result from the in- 
stitution of private property so long as individuals and families 
differ greatly in earning capacity and in prudence and fore- 
thought. Where these inequalities are found some individuals 
and families will enjoy large incomes, and out of these incomes 
will set aside for investment large savings, while others will 
accumulate little or nothing. In some families wealth and the 
qualities necessary to its preservation will become hereditary, 
and great fortunes will be passed on from parents to children 
through several generations. More frequently, if we may judge 



316 ECONOMICS 

from the experience of the United States up to the present time, 
the wealth accumulated in one generation will be gradually dis- 
sipated, either through division among numerous heirs or because 
those who inherit it lack either the capacity or inclination to 
keep it unimpaired. 

Undesirable as are inequalities in wealth, direct attempts to 
limit wealth accumulation would, in the author's opinion, be 
productive of more harm than good. A large and growing fund 
of capital is indispensable to the maintenance of efficient methods 
of production and no measures should be adopted that are likely 
to weaken seriously the motives to saving and investment. The 
reasons for putting no check on an individual's right to accu- 
mulate wealth do not apply, however, to his right to transmit 
it at death to his heirs. Even though hereditary fortunes may 
be dissipated after a few generations, it is nevertheless true that 
much of the Avealth in existence at any one time has been in- 
herited by those who own it. Limitations on inheritance by 
means of inheritance taxes are, therefore, effective means of 
lessening inequalities in wealth among the individuals in each 
oncoming generation. 

Of all forms of taxation, inheritance taxes are believed to 
be the least objectionable. They are easily assessed and col- 
lected. They cannot be shifted, but must be paid out of the 
inheritances on which they are intended to fall. Finally, they 
impose a minimum burden upon taxpayers, since after they are 
established they soon come to be thouglit of as reasonable charges 
imposed by the state for its services in protecting property and 
seeing that it passes into the possession of the legal heirs. For 
these reasons, as well as because they tend to lessen inequalities 
in wealth, large use should, in the opinion of the author, be 
made of these taxes as sources of revenue. The experience of 
other countries indicates that the best results are secured when 
inheritance taxes are made progressive. Small inheritances 
should be exempt from the tax. On larger inheritances the rate 
of taxation should increase by gradual steps until on large for- 
tunes it becomes a substantial deduction, one-fifth or even one- 
quarter, from the inheritance. If the large revenues that may 



TAXATION 817 

be derived from this source are used to advance the interests 
of the poor and thus lessen inequalities in fortune at the other 
extreme, steady progress may be made toward a more demo- 
cratic distribution of wealth and welfare. — H. R. Seager, "Eco- 
nomics : Briefer Course," pp. 458—460. 

260. Excise duties. — There are two general classes of 
indirect taxes, (1) excise duties and (2) customs. Ex- 
cise duties are taxes levied upon commodities destined 
for consumption. They may be either levied with the 
primary intention of producing revenues, as in the case 
of the tobacco tax, or to regulate consumption, as in the 
system of liquor licenses. 

The methods employed in excise taxation are three: 
stamps, licenses and monopoly. According to the first 
method, the tax is paid on each unit of consumption, 
and the payment of the tax is attested by the stamp 
certificate. The license is the payment for the privilege 
of sale of an article which it is desired to tax. The 
privilege of selling liquor is generally obtained in this 
^vay in the United States. The third method of tax- 
ation is the method of monopoly, as illustrated by the 
monopoly of tobacco in France, and the salt monopoly 
of India. 

Excise duties should be levied upon as few articles 
as possible. These articles should be luxuries and arti- 
cles in great demand. They should also be articles whose 
processes of making are simple and uniform. It is not 
desirable to tax the necessities of life, but a large revenue 
can be obtained by the tax on luxuries. Furthermore, 
since excise taxes interfere with industry, they should 
he limited as much as possible, and should be appHed to 
the smallest possible number of industries. 

261. Customs. — Customs are taxes levied upon com- 
modities when they cross national boundary lines or are 



318 ECONOMICS 

admitted within a customs territory consisting of a 
conlbination of countries, or of different parts of the 
country. The purpose of customs duties is ( 1 ) revenue, 
and (2) the regulation of industry. A tax for revenue 
should be levied according to principles similar to those 
requiring excise taxation. The tariff for revenue should 
fall upon as few articles as possible. Luxuries should be 
taxed at a higher rate than necessities ; customs duties 
should be imposed so as to interfere as little as possible 
with productive industries, and to this end also the tax- 
ation of raw materials should be avoided. The rate 
of taxation should be fixed at the point which will pro- 
duce the largest revenue to the state, the legislator keep- 
ing in mind that high prices diminish consumption, and 
low prices increase it. When duties are levied upon 
articles that are largely produced in the country laying 
the tax, excise taxes should also be levied in order that 
the state may derive full benefit from the tax. 

Customs duties may be either specific or ad valorem. 
Specific duties are levied by a fixed standard, as by the* 
yard or pound; ad valorem by the articles. Specific 
duties are more easily and cheaply collected, but are 
open to the objection that they bear more heavily upon 
the cheaper grades of articles which weigh as much as 
the more expensive varieties. Ad valorem duties, on the 
other hand, are open to the objection that they offer 
large inducement to • fraudulent valuation by the im- 
porter. In practice specific duties are generally levied 
on cheaper, coarser articles and ad valorem duties on 
the more expensive grades. 

262. The ideal system of taxation. — The ideal tax 
system should maintain a proper balance between direct 
and indirect taxes. The foundation of the tax system 
should properly be indirect taxes, because these will 



TAXATION S19 

reach the tax-paying capacity of the majority, much 
better than direct taxes. In addition to the indirect 
taxes, however, there should be a large element of direct 
taxes in order to levy the heaviest burdens upon those 
who are most able to pay high taxes, and in order to 
introduce an element of elasticity into the public 
revenue. 



PART IV : ECONOMIC PROBLEMS 

CHAPTER I 

RAILROAD PROBLEM 

263. Transportation a factor in our national economic 
life. — The importance of transportation as a factor in 
our national economic life cannot be over-emphasized. 
To say that the steel bands connecting the Pacific with 
the Atlantic, the Gulf with the Lakes, are the great 
arteries of the nation by which its life blood circulates, 
is no overdrawn figure of speech. The United States 
as it now exists, with its vast domains and rapidly de- 
veloping resources, would be an impossibility without 
its great transportation system. It is generally agreed 
that our present civilization could not have been attained 
except through the division of labor and it is equally 
true that the principle of the division of labor could 
never have been applied on other than the meagerest 
lines had it not been for the growth of transportation. 

264. Development of the railroad system. — The dis- 
cussion in this chapter will be on but one form of 
transportation — the railroad. It is at present by far 
the most important form and also the only one that 
has given rise to any serious problems. One cannot 
have a comprehensive grasp of the present railroad 
problem without at least a bird's-eye view of their past 
development, as many of the evils of the railroads 
evolved out of the nature of their growth. The age of 
the railroad was ushered in in this coun'try in 1830, when 

320 



THE RAILROAD PROBLEM 321 

the first railroad — the Baltimore and Ohio — was opened 
for traffic. During the next decade the railroads were 
short local lines. During the period 1840 to 1870 many 
new roads were built and the process of "linear con- 
solidation" — the linking together of local companies into 
through trunk lines — began. Before the close of this 
period, the New York Central and the Pennsylvania 
had affected through connections with Chicago. The 
Central and Union Pacific railways had connected the 
eastern roads with the Pacific Ocean. 

The next period is that between 1870 and 1890, when 
there was an unparalleled expansion of the railway 
mileage of the country from 52,000 to 160,000 miles, 
more than 200 per cent. In this period new routes were 
completed between the Atlantic seaboard and Chicago 
which resulted in a period of destructive competition 
which in turn led to discriminations and rebating in 
through traffic and the overcharging of local noncom- 
petitive traffic — two evils later to be dealt with by law. 
The railroads in this early stage sought to restrain 
competition by the creation of pools and traffic agree- 
ments which also later became the subject of legislation. 

The last period of railroad history, 1890 to the present 
time, has been characterized by an unprecedented 
amount of consolidation and combination among com- 
peting roads, until a number of men small enough to 
sit about a common table control the administrative 
machinery of the railway system of America — a system 
greater in extent than all the railways of Europe com- 
bined. 

265. The railroad a form of monopoly. — One cannot 
understand the real nature of the railroad problem un- 
less he keeps two points clearly in mind. First, that the 
railroad by the nature of its organization is a monopoly 

1—21 



322 ECONOMICS 

and must always be recognized as such, and second, 
that seUing transportation is not analogous to selling- 
ordinary commodities. 

The railroad is a monopoly because it is a business 
of "diminishing expense," that is, its expense of opera- 
tion materially decreases with its growth in business. 
Eivery railroad requires a large initial outlay of capital 
for roadbed, terminal facilities, rolling stock and the 
like. These expenditin'es must be made regardless of 
the volume of its traffic. For every additional hundred- 
weight of freight carried, the pro rata expense is re- 
duced. Such being the case, one can at least understand 
the motive which prompts the railroad traffic managers 
to go after additional freight at lower rates than those 
customary, or to offer lower rates to the large shipper 
than to the small. He is merely applying a practice 
common to all the business world. 

200. The railroad is quasi- puhlic in nature. — This 
leads to the second point which one must keep in mind, 
viz.: that selling transportation differs from selling or- 
dinary conmiodities. Two reasons explain the differ- 
ence: first, the fact that the railroad corporation has 
always stood in a different relation to the state from 
that of ordinary business corporations; and second, the 
fact tliat public welfare compels us to view railroading 
in a different light from other economic activities. 

A word is necessary to make clear each of tliese rea- 
sons. The state has always fostered railroad building. 
Constantly the state delegates to railroad corporations 
its own immemorial right of "eminent domain." If the 
state had not freely conferred this right on railroad 
corpoi-ations, tlie present American transportation sys- 
tem would have been an im])()ssibi]ity. Moreover, 
American railroads from the earliest times have received 



THE RAILROAD PROBLEM 3^3 

state aid in regard to their finances. There are no less 
than nineteen ctates which have advanced funds of con- 
siderable amounts for railroad construction. Some of 
them contracted debts amounting to no less than $30,- 
000,000 for the benefit of various railroads. In addi- 
tion, the national government has from time to time 
made large grants of land from the public domain 
amounting in all to no less than 100,000,000 acres of 
laftd. There is no parallel to this degree of state aid in 
any of the other economic activities of the people. 

Aside from this state aid aspect of the subject, the su- 
preme necessity for national welfare and common justice 
make it impossible to accept any other theory than that 
railroading, unlike ordinary business, is peculiarly amen- 
able to public regulation. The necessity of the case pre- 
vents us from allowing the railroad to sell its product as 
it chooses. Such a theory would place iii the hands of a 
few private citizens almost absolute* control of com- 
merce, give-them a taxing power over the public, equal 
to, if not in excess of, the taxing power of the govern- 
ment itself, and would allow a group of individuals, 
through this power, the opportunity to say which sections 
of the country shall prosper and which shall not, which 
individuals shall be allowed to amass fortunes and which 
shall be doomed to poverty. To escape from the evils 
of such a condition the state imposes on the railroad two 
broad restrictions which do not apply to business of 
a strictly private nature. First, charges (rates) must 
be reasonable; and second, the railroads shall be open 
to all persons, whether they be large or small dealers, 
on equal terms. 

267. The problem of discrimination. — The problem 
of discrimination includes some of the most serious 
phases of the general railroad problem. Outside of 



324. ECONOMICS 

the question of whether the traffic manager is willfully 
violating the law, the adjustment of rates between com- 
modities and between places is a problem of no small 
magnitude and one which requires nothing less than 
expert knowledge to solve. Discriminations may be of 
three kinds, viz.: between persons, between places and 
between cominodities. A discrimination between per- 
sons occurs when one shipper gets some special privilege 
not afforded to his competitor. It may be in the form 
of secretly low rates, direct rebates, or in the ability to 
get all the cars wanted, while his competitor is denied 
them on one pretext or another. Whatever the plan, 
it is a form of special privilege and inevitably results 
in the failure of the man discriminated against. Com- 
petition is so keen in business to-day that no man can 
long compete against one who can get his goods to 
market more cheaply. To make the situation more 
grave, the man discriminated against is usually the small 
shipper, the one, if any, who can least afford to pay 
the higher rate. 

Discrimination between places is a problem which is 
constantly arising. In many ways its effects are more 
far-reaching than the class of discriminations just dis- 
cussed. Two cities or two districts may be producers 
of similar products which are sold in competition in 
one market. A rate discriminating in favor of the one 
district means that it shall prosper and gain control 
of the market in question. Its merchants will grow 
wealthy while those of its rivals languish and their 
business dwindles. A case at issue at the present time 
is that of the res]:)ective cement rates obtained by Jersey 
City and Philadelphia on cement coming from the 
Northampton district. Jersey City enjoys a rate of 
eighty cetits per ton of two thousand pounds. The rate 



THE RAILROAD PROBLEM 325 

to Philadelphia is $1.35 per ton in car loads of fifty 
thousand pounds minimum per car except when the 
capacity of the car is less, when the actual capacity 
governs. Under this system of rates Philadelphia's ex- 
port trade in cement steadily dwindled, until the rec- 
ord for 1907 was two barrels. It is not to be expected 
that there can be any large development of an ex- 
port or coastwise shipment of cement from Philadel- 
phia until that port is given as low a rate and as favor- 
able a service as is granted to the railroad terminals 
on the west side of the Hudson River. 

Hardly less important than the type of discrimina- 
tions just discussed is that which may exist in the rates 
charged different groups of commodities. The differ- 
ence between the rates on flour and wheat may be such 
as to change the location of the milling industry from 
the West to the East, as would be the case if the l^ates 
on flour coming from Minneapolis were made so high 
in proportion to the rate on wheat, that the Minneapolis 
millers could not send their flour east, for it could no 
longer compete with wheat shipped east at dispropor- 
tionately low rates and then milled in the East. As 
a rule, it is to the interest of the traffic manager to 
arrange his rates so as to get all that "the traffic will 
bear," but this may work a hardship on many shippers. 

268. History of railroad legislation. — Such being the 
nature of the railroad business with its resulting enor- 
mous power, it is not at all surprising that steps should 
early have been taken by the government to insure to 
its citizens the management of the railroads in the in- 
terests of all its shippers regardless of size or location. 
At first the individual states passed laws to insure such 
treatment to their respective citizens but because of the 
magnitude of the problem and also because of lack of 



326 ECONOMICS 

uniformity of action, the states were able to do little 
that was really effective. The agitation did, however, 
call the attention of the public in a forcible manner to 
the nature of the j^roblem involved and so paved the way 
for federal action which was made possible by the clause 
in the United States Constitution which gives Congress 
power to regulate interstate commerce. The lesson 
which had to be learned before control was possible was 
that private competition among railroads cannot be 
trusted to correct railroad abuses and that, therefore, 
public regulation must be substituted. The monoj^oly 
nature of railroading had first to be firmly impressed 
on public opinion. People had to see that, granted com- 
petition could regulate railroad abuses, it was at best a 
blundering and expensive system of setting matters 
right. It is a great economic waste to have two railroad 
lines duplicating work which can be handled by one 
sj^stem. From a social point of view, such an expendi- 
ture of capital is uneconomical and therefore unjusti- 
fiable. 

269. Interstate Commerce Act of 1887, — As a final 
outcome Congress passed the Interstate Commerce 
Act in 1887. It was the result of the best knowledge 
then available of the subject. Experience soon proved 
tlie first act of Congress weak in parts. As a result, 
several supplemental acts, framed in the light of the ex- 
perience gleaned by the Interstate Commerce Commis- 
sion in its ceaseless endeavors to secure justice in railroad 
affairs, have since been passed. Although the present 
combination of laws governing railroads is not perfect, 
tliey have wrought a marked improvement over condi- 
tions existing prior to 1887. 

The first federal measure covered in the main five 
important points. First, unreasonable and extortionate 



THE RAILROAD PROBLEM S2T 

rates were prohibited. Second, discriminations between 
persons, places and commodities were prohibited. Rail- 
road officials making such discriminations were liable 
to fine and imprisonment. Third, all fares and rates 
v/ere required to be printed and made public and also 
filed with the Commissioner. Fourth, it is unlawful for 
any common carrier subject to the provisions of this 
act to charge or receive any greater compensation in 
the aggregate for the transportation of passengers or 
of like kinds of property, under substantially similar 
circumstances and conditions, for a shorter than for a 
longer distance over the same line, in the same direction, 
the shorter being included in the longer distance. The 
Commission was empowered to suspend this "long and 
short haul clause," as it is popularly known, whenever it 
deemed fit. Fifth, all pooling contracts between rail- 
roads were prohibited. A commission of experts ap- 
pointed by the President of the United States is 
empowered to carry out the provisions of the law. For 
this purpose the Commission has power to make investi- 
gations, to go over the books and papers of a carrier, 
and to compel testimony. An investigation may be 
made upon the complaint of a shipper seeking redress 
for damages or at the will of the Commission itself. 
If the Commission decides that the law is being violated, 
it may order the carrier to stop its illegal practices and 
award damages to those who have suffered because of 
the said violations. These orders of the Commission are 
not binding, should the carrier against whom they are 
made, care to disregard them. The Commission in such 
cases must appeal to the United States Circuit Court to 
enforce the order if it sees fit. 

270. ElJdns Law of 1903.— In 1903 the Act of 1887 
was amended by the Elkins Law. This appreciably 



328 ECONOMICS 

strengthened the government's control of the rail- 
road. Among- other things it makes the corporation, 
as ^\e\l as the agent or officer, liable to prosecution for 
violation of the law and hastens the wheels of justice 
by causing an appeal from the final decree of the Circuit 
Court to lie only to the Supreme Court and such appeal 
must be taken within sixty days from the entry thereof. 

271. Hepburn Act of lOOG.—lu 1906 Congress fur- 
ther extended the commissioners' authority by em- 
powering them to fix a maximum rate instead of, as 
formerly, to declare a certain rate unreasonable and 
there let it rest. The act further empowered the Inter- 
state Commerce Commission to require uniform ac- 
counting of all railroads under its jurisdiction. As a 
result the business of railroading has in a large measure 
ceased to be private, and has become open and pubHc. 
Thus the old problem of private competition versus pub- 
lic regulation has been solved. In its place stands 
the new problem of public regulation versus public 
ownership. 

272. Public regulation versus imhlic otcnershij). — 
Thus far the Interstate Commerce Commission has 
been denied the general power to fix rates. Many feel 
tliat under these conditions we must face the alternative 
of letting the railroads charge pretty much what they 
please or of adopting government ownership, and argue 
that if such could be accomphshed, the aim of the railroad 
would be better service instead of profits. They further 
contend for their side of the case, that personal dis- 
criminations would cease, that railway interests would 
})e eliminated from politics and that the unearned incre- 
ment of railroad values would accrue to society. Many 
also feel that were the American railroads nationalized, 
the abnormally high death and accident rate that now 



THE RAILROAD PROBLEM 329 

obtains, could be considerably lowered. The desire for 
profits would no longer prevent the installation of the 
best safety devices known to modern railroading. The 
important arguments in favor of private operation are: 
(1) efficiency in management; (2) greater elasticity in 
meeting the varying demands of business; (3) the dan- 
ger in government operation of throwing sectional dis- 
putes as to rates into politics. Whatever shall be*the 
ultimate outcome of the problem in America, it is certain 
that for some time at least we are going to make a more 
thorough experiment with private operation under gov- 
ernment regulation before we pronounce it a failure and 
adopt the only remaining course — government owner- 
ship of the railroads. 

Important as is the abolition of discrimination in rates, it 
cannot be accepted as a complete solution of the railroad prob- 
lem. According to our analysis railroads are in a high degree 
monopolistic. As the country becomes more densely populated 
and the volume of traffic grows, the earnings of old, established 
railroads should show a marked tendency upward. Unless their 
charges are regulated by administrative decree, they are likely 
to become increasingly unjust and unreasonable and to afford 
larger and larger monopoly profits. But if the Interstate Com- 
merce Commission is to accomplish its task of seeing to it that 
railroad rates are just and reasonable, not merely among them- 
selves, or relatively, but absolutely, it must have at its command 
all the data necessary for distinguishing the reasonable from 
the unreasonable. The meaning usually attached to the phrase, 
"just and reasonable," in connection with charges is that they 
shall afford a just and reasonable return on the investment. It 
would be impossible at this late date to determine what the origi- 
nal investment in railroad property in the United States actually 
was. The most that can be expected is that the Commission 
shall be enabled to make a fair estimate of the present value 
of the investment on which holders of railroad securities are en- 



330 ECONOMICS 

titled to a return and tliat it shall have some njcasure of control 
over the relation between investment and capitalization in the 
future. The first step that is currently advocated as a means to 
insuring just and reasonable railroad rates is the valuation of 
the physical property of the railroads of the country. Al- 
though this proposal is bitterly opposed by railroad managers, 
it can hardly be denied that it follows logically from the policy 
of rate regulation by Commission to which the Federal Govern- 
ment is now fully committed. Nor is there any good ground 
for believing that the carrjang out of such a proposal would be 
disadvantageous to investors in railroad securities. Most of 
the great railroad systems of the country are now conservatively 
capitalized since the correspondence between tangible assets and 
capital liabilities, which was so often conspicuously absent at 
the outset, has since been brought about either by failure and 
reorganization, or by an appreciation in the value of certain 
assets, particularly real estate. In addition to directing the 
Interstate Connnerce Commission to make an inventory of the 
property of the railroads, Congress must also empower that 
body to control future issues of capital stock and thus to deter- 
mine in the future the capital invested on which a return may 
be justly and reasonably claimed by investors. Without such 
power, the Commission clearly cannot carry out the task which 
the law has all along imposed upon it, that is, to see to it that 
only just and reasonable rates are charged. 

At the same time that regidation of the railroad industry is 
advanced this further step, a concession should be made to rail- 
road managers which they would greatly appreciate. In its 
amended fonn the Interstate Commerce Act leaves no doubt that 
Congress recognizes the failure of competition to regulate 
railroad rates in the public interest and proposes to secure such 
regulation through the Interstate Commerce Commission. Un- 
der these circumstances there is no longer any justification for 
the sweeping prohibition in the present law of agreements as to 
rates, pooling arrangements, etc. Not only the logic but the 
practical exigencies of the situation demand that the Commis- 
sion be empowered to authorize such agreements among the 



THE RAILROAD PROBLEM 331 

railroads as are not opposed to the public interest and that agree- 
ments so authorized have the force of legally binding contracts. 
Such a change would facilitate a more economical and stable 
organization of the railway business and also lessen the tempta- 
tion to discrimination. In the opinion of the writer these two 
important extensions of the regulative policy should be made 
as promptl}'^ as possible, for only in this way can this method 
of solving the railroad problem be given a fair trial. Then, 
to repeat the words of Judge Knapp, Chairman of the Inter- 
state Commerce Commisson, "If regulation fails, public owner- 
ship will be the next and early resort." — H. R. Seager, "Eco- 
nomics : Briefer Course," pp. 392-4. 



CHAPTER II 

TARIFF PROBLEM 

273. Basis of international trade. — We have now to 
consider the ri^uestic^n of the protective tariff. In order 
to discuss 'his question intelhgently, we must first un- 
derstand !he nature and objects of foreign trade. 
EfUgland produces cheap iron and coal; India, cotton 
and silk at a low cost of production. England could 
grow cotton and silk in greenhouses at enormous ex- 
pense; India could produce iron and coal at great cost 
and with much difficulty. It is obvious, however, that 
each country should devote itself to the production of 
those things which they are best suited by nature to 
produce, exchanging for them such products of other 
countries as they require. The permanent basis of in- 
ternational trade is differences in resources and produc- 
tions of different countries. The most important of 
these differences is that which exists between the tropical 
and the temperate zones. . The United States, for ex- 
ample, obtains from the tropical zone almost all of her 
sugar, all of her coffee, tea, a large amount of tropical 
fruits, rubber, cocoa, spices, tropical woods and a'great 
variety of other commodities. Most of these could be 
produced in the United States, and some of them are 
produced here. It is, however, more economical for 
the United States to devote the major part of her en- 
ergy to the production of lumber, iron, steel, coal, flour 
and wlieat products, and cotton which she can produce 
at low cost and in large quantities, and to use these 

SS2 



THE TARIFF PROBLEM 333 

to purchase the tropical products which she may need. 
In addition to the chmatical differences in the pro- 
ductions of the different countries, there are other dif- 
ferences existing between countries located in the same 
latitude. Examples of this difference are furnished by 
comparison of England and the United States. These 
countries have much the same climate, and they have 
in general the same industries. In most of these indus- 
tries, however, England can produce at lower cost than 
the United States. The English woolen mills com- 
pared with those of the United States are favored with 
lower wages, greater technical skill and cheaper wool. 
Consequently the English cost of production of woolens 
is much lower than the cost to the United States. Eng- 
land can produce goods at Bradford, pay ocean rates to 
ISTew York, freight to Chicago, and still undersell Amer- 
ican competitors. The same is true in glass, cotton, 
pottery and a variety of other industries. England and 
the other manufacturing nations of jSTorthern Europe 
excel the United States, generally speaking, in all those 
branches of production where skillful manufacturing 
labor is required and where wages form a large element 
in the cost of production. The United States, on the 
other hand, can hold her own in those industries where 
the price of labor and the large use of machines is 
important. Those industries in which England excels 
are, however, flourishing in the United States, and they 
have been brought into existence by our protective tariff. 
Without this artificial aid many of these enterprises 
would not now be carried on in this country. The ques- 
tion is often raised, however : granted that we now have 
these industries as a result of protection, have we not 
paid too high a price for them? This is the real point 
at issue between the Protectionist and the Free Trader. 



334 ECONOMICS 

274. Protective tariff defined. — There are two types 
of tariff, known respectively as a "tariff for revenue 
only" and a "protective tariff." The sole object of the 
former is to raise revenue for carrying- on the govern- 
ment. Accordingly articles are taxed regardless of the 
(juestion of aiding home industries. Thus England laj^s 
a tax on coffee and tea, though neither can be grown 
tliere. Tlie prime object of a protective tariff, on the 
other hand, is to tax only tliose articles which come into 
competition with home products. In the "tariff for 
revenue only" the rate of tax is fixed solely with referlj 
ence to the amount of money needed for government 
expenditures. In the protective tariff a different prin- 
ciple obtains in determining the rate of duty, namely, 
the relative costs of production in different countries. 
Thus if it costs a third less to weave woolen cloth in 
England due to a cheaper labor cost, cheaper wool, etc., 
the rate of duty imposed by the American tariff would 
be at least 50 per cent. 

275. Operation of a protective tariff. — A protective 
tariff operates by raising the price of the foreign article 
to such a height that the domestic product can success- 
fully compete with it. If the rate is so high as practically 
to exclude all foreign importation, no revenue goes to the 
government, but the domestic consumer pays a tax to the 
domestic manufacturer equal to the difference between 
the cost of the foreign product laid down in America 
and the selling price of tlie American product. In 
other words, the American producer gets all of the tax. 
If the tariff wall is not so high as to exclude all foreign 
competition, then the government receives the duty, 
lender the condition that we are the cliief market of a 
foreign producei- he must bear the tax in order to enter 
the American market If not, the tax is borne by the | 



THE TARIFF PROBLEM 335 

American importer, i. e., ultimately by the American 
consumero 

276. Theory of protection. — Protectionists admit that 
for the time being while the industry is being established 
the tariiF operates as a tax on the consumer of the pro- 
tected article. They hold, however, that this is merely 
a payment for benefits which will flow from the general 
prosperity of a nation which diversifies its industries 
and develops its resources. 

But it may be urged, why need a country employ 
artificial means to diversify its industries? If the 
natural basis for those industries exist they will de- 
velop themselves. This, however, is a false assumption. 
If an industry gets an early start in a given country 
or district, that country or locality is likely to retain 
its advantages because of the concentration there of 
capital and labor with the requirements and possibilities 
of the industry. Many industries are located at cer- 
tain places solely because of "the momentum acquired 
by an early start." In the early stages of an industry, 
the tariff acts as a stimulus, protecting the domestic 
producer from foreign competition. Protection may 
be accepted on sound economic grounds in all countries 
in a young and dynamic condition which desire to de- 
velop their resources and diversify their industries. 
We can, therefore, justify the attitude of the country 
that taxes itself at an early date for the sake of testing 
and developing the latent aptitudes of its land and its 
people. • At the outset it will thereby sustain a loss, 
because in the beginning it can gain more goods by 
the indirect method of exchange than it can by pro- 
duction; but there may easily come a time when it can 
gain more by the direct method. If we learn to make 
things more economically than we could originally 



336 ECONOMICS 

make them, if we hit upon cheap sources of motive 
j)Ower and of raw material, and especially if we devise 
machinery that works rapidly and accurately and greatly 
midtiplies the product of a man's working day, we 
shall reach a condition in whicli, instead of a loss in- 
cidental to the early years of manufacturing, we shall 
have an increasing gain that will continue to the end of 
time. It may be further stated that without protec- 
tion and the burdensome tax which it did undoubtedly 
impose upon us, we should have had to wait far too 
long for this gain to accrue and should have sacrificed 
the benefits that come from a long interval of diversified 
and fruitful industry. 

Professor Seager thus sunmiarizes the argument fo 
free trade: 



p 



The same reasons that make free exchange within a country 
advantag'cous may be urged in favor of free trade among coun- 
tries. Pohtical boundaries do not alter the essential facts that 
trade is at bottom an exchange of goods for goods in which 
both parties are gainers, and that the freer the conditions of 
exchange the more highly will the division of labor be devel- 
oped. Differences in the productive capacities of different 
countries fit some to produce some things, others, others. If 
free trade be permitted, each will tend to produce only those 
things for which it is best adapted and ^ i rel}'^ upon other coun- 
tries for the other things desired and in the production of which 
the latter have a relative advantage. The consequence will he 
a larger joint produce and a larger share of wealth for each 
country than it could secure if compelled to produce for itself 
all of the things that its inhabitants require. If restrictions 
on trade are to be approved, it must be because they accomplish 
results that compensate a country for the undoubted losses 
which they entail. — H. R. Seager, "Economics: Briefer Course," 
p. '2[n. 



THE TARIFF PROBLEM 337 

Professor Bullock illustrates the argument as fol- 
lows : 

The Immediate effect of establishing, by a protective duty, 
an industry that would not have been profitable otherwise, is to 
attract into a less productive industry capital that would have 
been invested in more productive channels. What is it that 
makes it possible for some American producers of wheat, corn, 
cattle, iron and steel products, cotton and cotton goods, leather, 
boots and shoes, tobacco, and oils to sell their products in for- 
eign countries at prices that enable them tO' compete with any 
producers in the world, while other American producers cannot 
do so? Simpler the fact that the first class of producers enjoys 
exceptional facilities, A protective duty upon articles that we 
cannot as yet produce as cheaply as certain foreign producers, 
simpl}'^ invites capital away from industries where we have un- 
paralleled advantages into industries where our facilities are 
not so good. Its immediate effect, therefore, must be to decrease 
the productivity of the capital invested in the protected indus- 
tr}"^, and to cause economic loss. 

But it may happen that the industry established by the pro- 
tective duty will prove to be one for which our producers have 
first-rate facilities. Inexperience or other initial difficulties may 
have been the only causes that prevented capitalists from mak- 
ing a profit by producing the product at the price of one dollar. 
It may happen that, in a few years, the domestic producers can 
overcome these difficulties, and make a profit by selling the com- 
modity at as low a price as the foreign producers. When this 
occurs, the industry would prove self-sustaining if the duty were 
removed ; and it would become a more profitable instead of a less 
profitable industry. Then the economic loss would cease, and 
the ultimate result of the protective duty would have been to 
hasten the establishment of the industry. The word hasten is 
italicized because such an industry would be one for which the 
country had good advantages — one which would have been 
quite sure to be established without protection, as the labor and 
capital force of the country increased. Protective duties may 



338 ECONOMICS 

hasten the growth of such entei'prlses ; but the economist must 
insist that they cause a less productive use of capital, hence an 
economic waste, until the industry becomes self-supporting. 
Tlicn the duty should be removed, and the economic waste would 
cease. 

It is possible that experience under a protective dnt}^ may 
show that the protected industry does not enjoy sucli great ad- 
vantages that producers can afford to sell at the prices charged 
by foreigners (in this assumed case, one dollar). Tliis is merely 
a demonstration that the industry' docs not enjoy such superior- 
ity over foreign producers as other industries of tlie country 
possess. A protected industry that does not become self-sup- 
porting causes a permanent economic waste. The labor and 
capital invested in it could have been employed more profitably 
in some other industry. 

277. The evils of "dumping/' — One of the strongest 
arguments in fiivor of protection is that it prevents 
"dumping." I5y dumping is meant the sale of prod- 
ucts abroad at prices lower than those charged at home. 
Dumping arises in a number of ways. Kxport bounties 
may be granted by the home countrj'' for the specific 
purpose of encouraging foreign trade; or a monopoly 
may find it profitable to dispose of a surplus abroad at ; 
]>ric'es which would be needlessly low in the highly pro- j 
tectcd liome market; and indeed, there is good reason I 
to believe that many manufacturei'S for the export trade 
make it a practice to sell abroad at unusually low prices 
whenever they believe that their foreign market is 
tln-eatened. Dumping is never permanent. So far as 
it may be said to have a rational object it aims to sup- 
press competing industries by selling temporarily below 
cost; and when those industries are forced out of busi- 
ness, prices will be raised. An interesting illustration 
of this policy is afforded as early as 18TS, when the 
English manufacturers in order to crush out iimcrican 



THE TARIFF PROBLEM 339 

industries and to regain their lost market sent to 
America shiploads of goods on most liberal terms in 
order to crush out the developing industries of America ; 
for in the words of a prominent English statesman of 
the time, "It is well worth while to incur a loss 
upon the first exportation, in order by the glut to stifle 
in the cradle those rising manufacturers in the United 
States." 

The problem confronting the dumping of foreign 
nations is by no means a dead issue, nor an unimportant 
one. It is such as to merit serious consideration at the 
present time, as is seen in iron and steel industries of 
England, Germany and the United States. 

278. ''Dumping" a present problem. — Of permanent 
competition from England and Germany in the heavy 
iron and steel trade, the United States Steel Corpora- 
tion has no reason to be afraid. This appears from the 
comparative prices of pig iron and steel rails. The 
prices charged by steel producers in free trade England 
are about equal to those charged in protectionist 
America. The tariff does not seem to make much dif- 
ference. The matter is not open to argument. The 
official figures of prices for the last decade are subject 
to only one interpretation. Over a period of ten years, 
the prices of iron and steel would not have been any 
lower in the United States if Americans had paid the 
cost to English consumers plus the cost of transpor- 
tation. 

But would American steel buyers have paid EngHsh 
prices? Here we come upon the heart of the whole 
controversy. Without the intervening wall of tariff 
duties, and whenever depression reduced the domestic 
demand for Enghsh and German steel, this country 
would have been made the dumping ground for the 



340 ECONOMICS 

surplus products of their mills at prices as close to the 
prime cost of production as would hav^e been necessary 
to make rapid sales. Price-cutting is essential to the 
success of occasional invasions of foreign markets. 
When the German or American producer attempts to 
sell rails in the English market, he encounters the strong 
though passive resistance of established trade conditions. 
He is regarded as an interloper. He can do little busi- 
ness save by offering great inducements in lower prices 
than those which the domestic producer is seeking to 
maintain. 

279. Why "^"^ dumping" is iiossihle. — The invader is 
influenced to reduce prices by another consideration. 
Every ton of steel unmarketable at home which can be 
sold at any figure above the cost of the labor and 
materials which goes into its making, adds to the profits 
of the producer, because it reduces his cost on the entire 
output of his mill. 

A German producer of rails may have a prime cost, 
that is, a cost for labor and materials, of $16 per ton. 
To this amount must be added expenses of maintenance, 
salaries, depreciation of plant and interest, amounting to 
$3,000,000 or $3 per ton. His total cost is, therefore, 
$19 a ton, and if he sells his entire output at $22.50 he is 
making large profits. But suppose that Germany 
suffers, as she is now suffering, from an industrial de- 
pression whicli reduces the domestic demand for the 
products of this mill, whose prices, if it is in a syndicate, 
we may assume to remain unchanged to the German con- 
sumer, to 500,000 tons. The fixed charges and fixed 
expenses of the mill remain unchanged at $3,000,000 
per year, only now, since they must be borne by half 
the number of tons as before, they are $6 instead of $3 a 
ton. This, added to the prime cost of $1C a ton, makes 



THE TARIFF PROBLEM 341 

a total cost of $22 a ton, leaving only 50 cents a ton 
profit and probably resulting in a suspension of divi- 
dends. 

The German steel maker looks about for relief from 
this situation. He finds a customer in England who vfill 
take 300,000 tons for a colonial railway if he can get 
them at $18, only $2 above the prime cost of their produc- 
tion, leaving no profit and paying only $2 towards fixed 
expenses and interest. In spite of the low price the 
German steel producer instantly accepts the offer, since 
it adds $600,000 to his profits for the year, bringing 
them up to $850,000. 

280. Production on a large scale economical. — To 
understand how this comes about it will be necessary to 
produce two statements : The first showing the expenses 
and receipts of our steel mill, when producing 500,000 
tons, just half its total capacity, and selling this reduced 
output at $22.50 per ton in the domestic market; and the 
second, showing the same items changed by the addi- 
tion of 300,000 tons of export business sold at $18 per 

ton. 

I. 

EXPENDITURES. INCOME. 

Materials and labor $ 8,000,000 500,000 tons @ $22.50 $11,250,000 

Interest, salaries, mainte- 
nance, etc. 3,000,000 

Net profit 250,000 

$11,250,000 $11,250,000 



IL 

Materials and labor $12,800,000 500,000 tons @ $22.50 -> „jg ^^^ ^^^ 

300,000 tons @ 18.00 J ' ' 
Interest, salaries, mainte- 
nance 3,000,000 

Net profit 850,000 

$16,650,000 $16,650,000 



342 ECONOMICS 

The significant figure in the calculation is the $3,000,- 
000 of fixed charges and expenses which must be paid 
whether the sales are large or small. Because of this 
fact, anything above $16 a ton is so much clear gain, 
and, if necessary to get the business, a price of $16.25 
Avill be named. By accepting this low priced order of 
300,000 tons, instead of a beggarly $250,000, a year, 
entirely too narrow a margin for safety, the German 
producer raises his profits to ahnost $850,000, a re- 
spectable and comfortable sum. For the same reason, 
if a price of $18 would not bring out English business, 
the Cxcrman could very well afford to go down to $16.25, 
only 25 cents direct profit, but adding $75,000 to his 
year's earnings. Lower than $16 he would not go. 
Each ton of steel must pay the cost of its own produc- 
tion. Down to $16, however, the German exporter will 
Aery cheerfully descend. 

281. The United States Steel Corporation and 
"dumpingJ" — The United States Steel Corporation 
occasionally follows the same course, pushing its wares 
into foreign markets by offering prices which would 
spell ruin if applied to its domestic business, but which 
show large additional profit when the object is merely 
to cut the fixed expenses and charges which must be 
borne bj'' each ton of the corporation's output. The 
consecjuences of this policy to English producers are 
most unfortunate. Although the volinne of these cut 
price imports may not be large, compared with the total 
sales of English mills, they nevertheless tend to demoral- 
ize the trade, they make consumers dissatisfied, and under 
some circumstances they may break down prices to a 
point where all but the strongest domestic producers are 
losing money. This "dumping" of low priced goods 
by German and American producers whenever industrial 



THE TARIFF PROBLEM 343 

depression reduces their domestic demand, furnishes 
to the Enghsh protectionist his soundest argument. 
While it has not yet prevailed to change the time- 
honored policy of free trade under which England has 
prospered and which the ruling classes regard as the 
cause of her prosperity, the existence of the "dumping" 
evil is recognized, and students of British policy believe 
that measures of protection, if not of retaliation, must 
eventually be adopted by the government. 

282. A tariff wall prevents dumping. — We have 
now reached the answer to the question with which we 
started. Free trade in iron and steel for the United 
States means that this country shall open its doors to the 
free entry of the surplus products of British and Ger- 
man mills whenever industrial depression makes Ameri- 
can sales profitable. With the tariff removed, British 
and German steel can be sold at a small profit as far 
west as Chicago and St. Louis. Throughout the 
eastern states, where most of the iron and steel produc- 
tion is utilized, the present scale of prices would offer the 
foreigner, even after the sea and rail rates were paid, a 
considerable margin of profit. That he would take ad- 
vantage of this opportunity to enter the greatest steel 
market in the world and thus keep his mills in full 
operation whenever the domestic demand failed him 
must be admitted. 

The effect of these sales upon the United States Steel 
Corporation and upon the American iron and steel in- 
dustry, will depend somewhat upon circumstances. It 
must not be supposed that these imports will be con- 
tinuous. American producers would have the great 
advantage remaining that their methods, rolls, sizes and 
grades are adapted to local needs. Their business 
alliances, also, especially in the case of the United States 



344 ECONOMICS 

Steel Corporation, would greatly assist them in holding 
the market. Throughout a large section of populous 
territory in the West, moreover, they need not fear 
European competition. The erection of large works at 
Gary, Indiana, and Duluth, Minnesota, by the Trust, 
is a recognition of the growing importance of the West 
as a consumer of steel. Finally, it is reasonable to sup- 
pose that the railroads would aid the American steel com- 
panies, which furnish them a large amount of freight, 
by adjusting rates to the disadvantage of the importer. 
Altogether, this combination of natural advantages 
would seriously handicap the foreigner in his attempt 
to enter the American market. They would invade us 
in force only when compelled by the decline of their 
domestic business. 

283. Foreign importations not always an evil. — 
Furthermore, unless industrial depression in eitlier 
England or Germany coincided in point of time with 
depression in the United States, free iron and steel would 
prove to the American consumer an undisguised blessing, 
and would in no way injure the producer. For example, 
the demand for steel for three years prior to the autumn 
of 1907, can be described by no milder word than 
ravenous. All the mills were far behind with their 
orders; even higli premiums could not hasten deliveries. 
At the same time the railroads were congested with 
freight. If cars moved forward fifteen miles a day over 
the trunk lines the consignee might count himself for- 
timate. At such a time it would have been most 
beneficial to the consumer of steel along the Atlantic 
seaboard if the tariff had been removed, and foreign 
iron and steel allowed to enter. As it was, even in the 
face of duties of $4 a ton on pig iron, $7.84 on rails, and 
so on to higher figures, $30,000,000 of iron and steel 



THE TARIFJP PROBLEM 345 

13roducts, so great was the demand, were imported dur- 
ing the 5^ear ending June 30, 1906. Prices would not 
have been affected under these conditions by the largest 
imports which England and G ermany have ever been in 
a position to send us. One very obvious solution of the 
tariff problem has been suggested, that a permanent 
tariff commission should be appointed with power to 
remove or restore duties according to the conditions of 
the domestic market. Such a commission need have had 
no hesitation in removing the iron and steel duties during 
1906. On the other hand, in 1908, when England and 
Germany were suffering along with the United States 
from a world-wide industrial breakdown, the absence of 
tariff protection would have meant that prices would 
have been slaughtered by heavy importations and the 
Steel Trust forced into bankruptcy by its abnormal fixed 
charges, $56,700,000 a year, which a 25 per cent decline 
in prices would have left the company insufficient rev- 
enues to meet. 

Whether such a result would make for the general 
welfare, it is difficult to decide. It is, moreover, prob- 
able that before another depression may be expected, the 
Steel Trust will have grown so strong as to view with 
indifference the efforts of foreigners to invade its terri- 
tory. Whatever our opinions as to the future, however, 
it is a satisfaction to reach the conclusion that whatever 
the tariff may have done toward creating and supporting 
monopolies in other lines of production, its only relation 
to the Steel Corporation has been to protect it, in com- 
mon with other American producers of iron and steel, 
from the surplus production of Germany and England. 

Whatever may be the respective arguments of free 
trade and protection, it is not expected by wisely in- 
formed students of this question that the United States 



346 ECONOMICS 

will abandon the protective system. The fact remains 
that an enormous amount of capital is invested in pro- 
ductive industries, and that a large number of employes 
are de])endent upon these for their living, and that the 
abolition of the tariff would mean ruin for many of these. 
15iit while protection may well be considered the settled 
]K)licy of the American people and the voice of free 
trade silenced as far as practicaV affairs go, it by no 
means follows that the tariff* question is no longer a live 
issue. While we as a nation believe in protection, the 
kind and amount of protection is ever a matter open to 
discussion. It is contended that the recent protective 
tai'iffs have aided the growth of monopolies, that the 
achnitted testimony of one of the trust magnates is to 
tlie effect that the "tariff is the mother of the trusts." 
How the tariff shall be used only to protect American 
industry and not to enable overgrown monopolies further 
to enrich their coff'ers, is a prominent part of the 
jH'esent tariff agitation. 

'284. The need for reciyrocity. — Another part of the 
tariff problem refers to the su])ject of reciprocity. The 
high tariffs passed at the time of the Civil War, and 
since maintained with occasional modifications, have af- 
forded our industries a virtual monopoly of the American 
home market. For some time after the close of the war 
the American producer found that this market was all 
that he could handle. We have now reached a place in 
the develo2)ment of our manufacturing where the Ameri- 
can producer has outgrown the American market. He 
feels that he is entitled to a slice of the world's market. 
The means to this end is reciprocity. This growth of 
American manufacturing has resulted in a strong de- 
mand for a more liberal tariff policy. Going hand in 
hand with this agitation there has been an increasing de- 



THE TARIFF PROBLEM 347 

mand for a lowering or entire removal of the tariff duties 
on the raw materials of manufacturing. This is desired 
so that the American manufacturer will not be handi- 
capped in neutral foreign markets by being compelled to 
pay more for his raw material than his English or Ger- 
man rivals. There is no excuse or justification whatever 
for the tariff on lumber, copper, bituminous coal, raw 
wool and hides. The manufacturing interests in the 
United States need cheap raw materials, no matter from 
where these materials are derived. 

285. What hind of a tariff system shall we adopt? — 
A final phase of the tariff problem involves the question 
of the kind of tariff system that we shall adopt. There 
are in vogue at present three general types, known as 
the general autonomous tariff, the maximum and 
minimum tariff and conventional tariff. The United 
States has the fii'st kind, France the second, and Ger- 
many the third. 

There is a growing feeling in the United States 
that a straight general tariff such as the United States 
has, is too inelastic and is therefore not suited for a 
nation seeking to gain trade concessions from other 
nations. In many ways the German system of making 
individual trade treaties with other nations is the 
most satisfactory sj'-stem of conserving at the same time 
the interests of protection and of reciprocity. However, 
this system could not be readily introduced into the 
American system of government since its treaty-making 
power rests in two separate branches of the government. 
A commercial treaty requires centralized authority and 
a certain degree of diplomacy in its execution. Con- 
sidering all phases of the question, the maximum and 
minimum system seems best suited to American condi- 
tions. After this general problem referring to the kind 



348 ECONOMICS 

of tariiF, is settled, there still remains the question as to 
what shall constitute the difference between the maxi- 
mum and minimum duty and many details of adminis- 
tration. Finally a tariff perfectlj^ adjusted to American 
conditions to-day may be wholly out of harmony with 
conditions a decade hence. The tariff problem can 
never be definitely settled for all time, but this is merely 
the price which all nations must pay which would remain 
in a progressive and dynamic condition. 



CHAPTER III 

TRUST PROBLEM 

286. The he ginning of the trust movement. — In the 
following account of the history of the trust movement 
the writer has borrowed liberally from those sections of 
"Trust Finance" ^vliicli treat of that subject.^ 

The Standard Oil Company, the first trust, was or- 
ganized in 1882. The second large combination was the 
American Sugar Refining Company, which was formed 
in 1887. With the organization of these combinations 
the trust movement may be said to have begun. It did 
not, however, assume immediate importance. It is true 
that the period immediately following the organization 
of the Sugar Trust was marked by a general outcry 
against monopoly, and that popular sentiment took 
form in numerous anti-trust laws enacted by state legis- 
latures and in the drastic Sherman Law of 1890; but 
neither the number of companies formed, nor their 
aggregate capitalization and resources, gave any reason 
to suppose that the movement toward the uniting of 
manufacturing plants into large combinations would 
assume a more than limited importance. Up to 1893, 
when the panic put a sudden stop to all kinds of com- 
pany promotion, the securities of only twenty industrials 
of any importance had been listed on the New York 
Stock Exchange. Besides those already mentioned, the 
principal combinations were the National Lead and the 
Distilling and Cattle-Feeding Trusts, both organized 

lE. S. Meade, "Trust Finance."— Appleton & Co. 

349 



350 ECONOMICS 

in 1887; the American Tobacco Company in 1890, and 
the General Electric Company in 1892. With the ex- 
ception of the sugar, oil and rubber trades, there was not 
even an approach to monopoly ; only a few of the leading 
industries had been consolidated; and the total capital 
stock of all the manufacturing combinations organized 
from 1860 to 1893, inclusive, was less than $1,000,- 
000,000. 

287. The rapid grotvth in 1898. — The real trust move- 
ment dates from 1898. Four years from that date 
found the leading industries of the United States reor- 
ganized along lines of consolidation. In three years, 
1898-1900, one hundred and forty-nine large combina- 
tions, with a total capitalization of $3,578,650,000, were 
formed. Hardly an industry escaped consolidation. 
Coal-mining, iron and steel, copper, lead, zinc and silver ; 
paper, leather, rubber, salt, starch, chemicals, cordage, 
ice, glass, paving, and roofing, practically all of the 
gi-eat industries whose produce is used in further pro- 
duction, have been in large part consolidated. 

The field of consumption goods, i. e., those products 
which are sold over the retail counter, has been scarcely 
less affected by the combination movement. In this 
field we have the oil and sugar companies already men- 
tioned, the Standard Oil Company having been formed 
anew in 1899. We have beer, whiskey, and tobacco 
produced by trust organizations. The United Fruit 
Company, the National Biscuit Company, the Diamond 
Match Company, the American Woolen Company, the 
International Thread Company, the American Writing 
Paper Company, the United States Flour-lMilling Com- 
pany, tlie International Silver Company, have been or- 
ganized to produce the necessities or the luxuries of the 
consumer. 



THE TRUST PROBLEM 351 

The trust movement began with the close of the in- 
dustrial depression which followed the panic of 1893, and 
which, as a matter of origin, can probably be traced to the 
panic caused by the failure of Baring Brothers in 1890. 
During this period, the steady fall of prices, and the 
slow-moving liquidation of credit had severely handled 
the manufacturers and merchants of the United States. 
The aggregate liabilities of failure in manufacturing 
and trading from 1894 to 1898 exceeded $725,000,000. 
Many of those who did not fail outright labored under 
heavy burdens of debt. Few men earned large profits ; 
almost every one had his scale of earnings greatly re- 
duced. Manufacturers saw their plants deteriorate 
for lack of the money to keep them in repair. Bank 
clearings decreased, from 1892 to 1893, $8,700,- 
000,000. 

The securities market was especially depressed. An 
index number made up from the prices of ten leading 
railroad stocks shows a decline from 1892 to 1896, of 
31 per cent. Sale of stocks on the New York Stock 
Exchange from 1894 to 1896, compared with the period 
1891 to 1894, decreased $100,000,000. Although the 
general depression throughout the country produced a 
large surplus of idle funds which flowed into the New 
York banks, the low interest rates resulting were power- 
less to excite public interest in speculation. The people 
were busy paying their debts. They had just experi- 
enced the penalties of optimism, and they were in no 
humor for risk-taking. The Financial Review of 1895 
sums up the financial situation as follows: "The result 
of these hard times has been to make our own investors 
unusually cautious and to produce extreme wariness of 
American securities on the part of foreign capital. 
Under such conditions it could not be expected that the 



35a ECONOxMlCS 

listing of stocks and bonds representing new enter- 
prises would be heavy." 

288. 21ie relation of prosperity to the trust move- 
ment. — With the summer of 1897, recovery began. A 
large wheat-crop, sold at good prices, increased the earn- 
ings of the grain-carrying railroads and stimulated 
investment in their securities. From 1896 to 1897, the 
earnings of the five "Granger" roads running into Chi- 
cago increased $13,000,000. The effect of increased 
earnings was soon felt in the stock market. During 
1897, the prices of these Granger stocks increased as 
follows, the first quotation being the lowest price in 
January and the second highest price recognized during 
the year: 

Atchison, Topeka & Santa Fe (preferred) .' 22% to SoVb 

Chicago, Burlington & Quincy 69% to IO214 

Chicago, Milwaukee & St. Paul 73% to 102 

Chicago & Northwestern 10314 to 132yo 

Chicago, Rock Island & Pacific 677/3 to 9714 

Other railroad stocks advanced in sympathy with the 
Grangers, the increase being as much as twenty points 
in the case of several roads, and reaching 29l,{) in North- 
ern Pacific preferred. Under the stimulus of higher 
prices, the sale of stocks on the New York Stock Ex- 
change increased in one year 22,000,000 shares. The 
buyer, hov/ever, was as yet almost wholly confined to 
old securities. Large amounts of low-priced reorgan- 
ization securities were coming into the market, and the 
tempting bargains which these offered occupied the 
attention of investors; while the rapid rise in all rail- 
road stocks furnished abundant opportunities for spec- 
ulation. 

The industrial revival gathered strength in 1898; 
another large harvest and continued high prices in- 



THE TRUST PROBLEM 353 

creased Granger earnings $16,650,000 over the high 
figures of 1897, and these stoclvs continued to hft the 
entire market. Other industries also increased their out- 
put. From 1898 to 1899, for example, the production 
of pig iron increased 2,121,000 tons. Foreign trade 
was also favorable. During 1898, exports of mer- 
chandise exceeded imports by $594,000,000, and an im- 
portation of $104,000,000 of gold strengthened the basis 
of American credit. General business was stimulated 
by these favorable conditions. From 1896 to 1898, 
New York clearings increased $13,000,000,000. The 
rapid improvement of business united with the success- 
ful result of the Spanish War to inspire in all classes the 
most sanguine optimism. The people believed that good 
times and high prices had come to stay, and the national 
feeling found instant expression in the quotations of 
securities. 

The first buying of stocks came from the investors 
who were attracted by the large earnings of railroads 
to transfer their capital to more promising investments. 
A speculative demand for these securities set in at the 
same time, and large amounts were bought to sell at an 
advance. The profits which were rapidlj^ realized at- 
tracted wide notice and the demand for stocks became 
general. The stock market was the place where money 
was to be made. People of every class and condition 
caught the fever of speculation and were ready to buj^ 
It was impossible to supply this demand for stocks from 
existing issues. Most of these were held for invest- 
ment, and only small quantities came into the market. 
The time was ripe for the promotion of new enterprises. 
New companies were organized and their securities were 
readily sold. 

289. The proinoter and the trust movement. — This 

1—23 



854 ECONOMICS 

condition called the "promoter" to the front. It is the 
promoter who organizes new companies and places their 
prospects before the speculative and investing public. 
His organizing energy usually, although not of ne- 
cessity, follows the line of largest immediate advantage 
to the community. If there is an opportunity for new 
industries or new combinations of industries, the pro- 
moter organizes companies to take advantage of the op- 
portunity. Noting the most promising outlets for 
industrial activity, he capitalizes the new opportunities 
and markets the securities while the public is in the 
humor of buying shares. If we go back to the early 
years of our industrial history, we find the promoter 
organizing banking and land companies. At a later 
period, railroad schemes were put on the market. Public 
service corporations, mines, and street railways have A 
each had their share of attention. Whene\'er an oppor- 
tunity is presented for the exploitation of new resources 
or new conditions, the promoter is on hand with his 
prospectuses and his propositions "to be submitted to j 
the approval of the investing public." 

Railroads had furnished the bulk of the new securities 
since the Civil War, but in 1898 large amomits of low- 
priced railroad stocks were no longer available. The 
country has been well equipped with transportation fa- 
cilities and few projects for new mileage were put for- 
ward. From 188G to 1889, 28,177 miles of railroad 
were constructed, from 189() to 1899 only 7,427 miles. 
From 188G to 1889, $1,107,000,000 of railroad securities 
were issued. From 1896 to 1899, however, there was an 
increase of only $371,842,000 of railway stocks and 
bonds; many of these, moreover, being investment se- 
curities and selling at high prices. The former outlet 



THE TRUST PROBLEM 355 

for investment had been closed, and a new one was to 
be opened. 

This outlet was furnished by the organization of the 
industrials. Says the Financial Review of 1900 in its 
report for 1899: 

The extreme industrial activity engendered a feeling of great 
confidence, very propitious to the creation and multiplication of 
new industrial enterprises. Easy money in the early months, 
caused by a congestion of currency at this center, materially 
aided the movement. The result was the formation and flotation 
of industrial undertakings of enormous magnitude and in un- 
paralleled numbers. In every industry, in every line and branch 
of trade, great consolidations and amalgamations were planned, 
and in most cases carried into effect. It was the great opportu- 
nity of the promoter, and he was not slow to avail himself of it. 
Seeing in any given trade a large number of separate businesses 
or manufactories his effort was to merge them together in one 
large corporation, incurring partial or complete control, and 
giving at least the appearance of monopoly. 

When one considers the severe nature of the competi- 
tion to which manufacturers on all hands had been sub- 
ject prior to 1898, it is not difficult to understand why 
the regime of free competition was productive of 
manifold hardships to the manufacturer. Competition 
might be considered the life of the trade, but at the 
close of the last industrial depression it was regarded 
as the death of profits. It was highly desirable from 
the manufacturer's view-point to stop, or at least abate, 
this struggle, which benefited nobody save the consumer, 
and which, even in his case, in the field of production 
goods, had to be straightway passed on his own cus- 
tomers. The producers were tired of working for the 
public. They desired a larger profit without such an 



356 ECONOMICS 

effort to get it, and they wished to have the profit avail- 
able for distribution and not locked up in plant and 
equipment. In 1898 and 1899 the time was ripe for a 
change. JNIen were weary of competition, and the era 
of combination was gladly welcomed. 

290. Evolution of the trust. — Many attempts had 
been made before 1898 to lessen the recognized evils 
of competition. These attempts had usually taken the 
form of pools, many of which, especially in the iron 
and steel trades, were organized during the last indus- 
trial depression. A pool is a voluntary association of 
sellers who place the marketing of their product under 
some central control or general restriction. The primary 
object of such agreements is to secure profitable prices, 
either directly or by means of payments from a central 
treasury, to the members of the association. The 
methods by which these profitable prices have been se- 
cured are in general as follows: (1) The output of 
the mills included in the association is restricted, so that 
the prices can be advanced by the limitation of supply; 
and (2) the buyer is held to the regular quotations, 
and is unable, by playing off one competitor against 
another, to obtain special concessions. The pool may 
go further than the regulation of prices and output; 
it may secure favorable terms on material purchased; 
it may deal as an association with railroads to obtain 
such concessions as are granted to large shippers, and 
it may assist its members in dealing with organized 
labor. As a general proposition, however, the purpose 
of a pool is to regulate production and control prices, 
leaving other details of management to the separate 
companies. 

291. The weakness of the jjool. — The essential weak- 
ness of this form of organization is its inability to en- 



THE TRUST PROBLEM 357 

force its agreements. The necessity of voluntary assent 
on the part of every member of the association, the 
hberty of each to withdraw on short notice, and the dif- 
ficulty of establishing relations of mutual confidence 
among competitors, all unite to emphasize this defect. 
The members of a pool have long since formed the 
habit of closely scrutinizing the moves of those in the 
same business, and even a small misunderstanding often 
creates a feeling of mutual distrust and apprehension 
which works the destruction of harmony and the final 
dissolution of the organization. 

The successful management of a pool is peculiarly 
difficult during a period of business depression, when 
business at remunerative prices is hard to get. Strong 
producers at such a time are suspected of attempts to 
obtain more than their allotted share of orders by meth- 
ods which are contrary to the spirit, if not the letter, of 
the pool agreement. For example, the Bessemer Steel 
Pool originally applied only to the tonnage of steel 
billets, ingots, bars or slabs. The steel which was rolled 
into merchantable shapes did not count in the allotment. 
Some of the large producers took advantage of this 
fact to market as much as possible of their output in 
the form of finished material, by this method of indirec- 
tion far exceeding the limits of their allotment, and they 
could not be penalized for so doing. Such offenses 
against the pool agreements made their permanent con- 
tinuance impossible. 

292. The original organization of the trust. — The 
"Trust" movement of the eighties promised a more sat- 
isfactory restriction of competition. In this form of 
organization, agreement among manufacturers as to 
prices and outputs was secured by depositing the stocks 
of the constituent companies with trustees in exchange 



358 ECONOMICS 

for trust certificates. These entitled the holder to such 
dividends as might be declared on the stocks, and also 
empowered them to vote for the trustees in the same 
manner as the stockholders of a corporation elect their 
directors. The trust certificate, moreover, could be 
dealt in on the stock exchange in the same way the 
certificates issued by the voting trust of a corporation. 
The trustees, being in control of the stock of the sev- 
eral corporations included in the trust, directed the man- 
agement of these companies, and secured a uniform 
policy upon prices and output. Permanence of control 
was secured by making the transfer of stock to the 
trustees, except by formal dissolution of the trust, as 
provided for in the articles of the association, irrevocable. 
The trust, so far as it included former competitors, 
furnished a more satisfactory restriction of competition 
than the pool. It was open to fewer objections; its 
organization was permanent; its government was 
centralized, responsible and representative. The con- 
trol of the constituent corporations by the central 
organization — the trustees — was complete, for the 
trustees elected the board of directors of each of 
the constituent companies. Because it was permanent 
and centralized, the tiiist pursued a more enlightened 
policy as to prices than the pool. The Standard Oil 
Trust made a considerable reduction in the price of 
refined petroleum, and the sugar trust, althougli foi* 
some years in practical control of the market, did no 
more than to restore prices to a living basis. The Whis- 
key Trust attempted to charge excessive prices, but the 
com])lete faihn-e of its attempt, owing to growth 
of comj)etiti()n, justified tlie wisdom of more conserva- 
tively managed oiganizations. The Cotton Oil, Lin- 
seed Oil, and Lead Trusts showed no disposition to prac- 



THE TRUST PROBLEM 359 

tice extortion upon the consumers of these products. 
The trust, as a device for the control of competition, 
was satisfactory. Its legal position, however, was in- 
herently defective. 

293. The trust declared illegal. — The trust agree- 
ments were matters of record. Their organizations were 
made under the usual legal forms, and the details of 
these organizations could not he concealed. The trus- 
tees could not refuse to disclose their authority for 
issuing the trust certificates which were dealt in on the 
exchanges. Any stockholder could enforce his right to 
examine the constitution and working of the trust which 
held his property. Neither could the fact be concealed 
that these corporations, whose identity and active life 
had been preserved, were, under the trust agreement, 
no longer masters of their own actions. They had sur- 
rendered their delegated power to the trustees. A 
perfect "combination in restraint of trade" had been 
effected, and in view of the manifold statutes prohibit- 
ing these self-evident combinations, the dissolutions of 
such combinations waited only for an attack upon their 
right to exist. 

This came in 1890, when the Attorney-General of 
New York successfully brought suit against the North 
River Sugar Refining Company under the common 
law. The Standard Oil Trust was also declared illegal 
on similar grounds by the Supreme Court of Ohio in 
1892. 

The result of these suits showed that even without 
the new menace of the Federal anti-trust law the legal 
position of the trust had become impossible. The States 
had prohibited all combinations in restraint of trade. 
The corporation is the creation of the State, and the 
State can revoke the powers which it has granted when 



360 ECONOMICS 

these powers are exceeded or unlawfully exercised. 
Certain corporations had combined into trusts in order 
to limit competition — i. e., to restrain trade. These cor- 
porations had exceeded their powers, they had violated 
the laws of the states which had created them, and their 
charters were therefore forfeited. Unless some new 
device could be discovered by vv^hich the hardships of 
competition coidd be alleviated, the pool, whose exist- 
ence, though illegal, could be partially concealed, and 
which was ordinarily safe from legal attack, whenever 
regulation was required, must still be employed. Its 
defects were generally admitted, and it has very often 
aggravated the very evils which it was designed to cure ; 
but if the trusts are to be forbidden, the pool seemed 
to be the only foi-m of combination possible. 

294. The holding compaiiy. — Before 1889, when the 
corporation law of New Jersey was revised, the laws 
of no state authorized the chartering of a corporation 
for the general purpose of owning the stocks or prop- 
erty of other corporations. Consolidation of corpora- 
tions was more generally permitted, but the purchase of 
stocks of other corporations by a holding company was 
not considered to fall within the field of corporate priv- 
ileges. There were but few exceptions to the general 
rule that a corporation should be organized for a specific 
piu'pose or for closely allied purposes. Pennsylvania 
had gone so far as to prohibit incorporation for more 
than one purpose. 

Now it was plain tliat the trusts could be preserved 
if a new corporation could be formed which was em- 
])owered to purchase, either for cash or with its own 
stock, the stocks of the several companies which were 
included in the trust, and whicli it was desirable to keep 
united under some form of permanent control. The 



THE TRUST PROBLEM 361 

only changes which would be made by such an arrange- 
ment in the organization of the combination would be 
these : ( 1 ) To substitute for the certificates of the old 
trust the shares of the new corporation; (2) to change 
the relation of trustee and trust into the relation of 
owner and property; and (3) to substitute for a board 
of trustees a board of directors. The result would be 
a single corporation whose assets were the securities 
of other corporations, each one in full possession of 
its corporate faculties and exercising all of its lawful 
corporate activities; but the affairs of all would be 
placed under the permanent direction of the company 
owning a controlling interest in the stock of each, and 
competition among these companies would thus be pre- 
vented. The holding company, if this course seemed 
preferable, after acquiring the stocks of a corporation, 
would dissolve it, remaining in possession of the prop- 
erty which the canceled stock represented, and the se- 
curities-holding company would also purchase the 
property of partnerships or individuals without resort 
to the expedient of organizing them into corporations 
in order to place their ownership in trust, as was for- 
merly necessary. 

295. The success of the holding company. — It is true 
that this proposition of the holding company, first 
broached about 1890, did not differ in principle from 
the illegal trust which it was intended to supersede. 
The same combination in restraint of trade existed as 
before. If anything, the new combination, which was 
one of ownership and not of trusteeship, was more per- 
fect than the form which had just been declared illegal. 
The suggested plan was a violation of both the spirit 
and the letter of the anti-trust laws which had just 
been successfully invoked against the sugar trust. A 



362 ECONOMlCb 

company whose sole reason for existence was to contrc^l 
the ownership of previously competing corporations had 
manifestly effected a combination in restraint of trade. 
All this was admitted. JNIoreover, no state in which the 
sentiment against monopoly was strong enough to pass 
and enforce the anti-trust law, could be expected so to 
amend the statutes of incorporation, as to permit the 
(n-ganization of corporations to evade the law. How- 
ever attractive the proposition might be, there seemed 
to be no way to bring about the authorization by one set 
of laws of a kind of corporation whose reason for exist- 
ence and whose purpose of organization another set of 
laws explicitly forbade. 

The difficulty seemed to be insurmountable. For the 
sake of profits, competition must be restricted. The 
law said that its restriction was illegal. No state legis- 
latiu'e would have rim the risk of legalizing the forma- 
tion of corporations to perform tcithin that state acts 
which would have necessitated the repeal of an anti- 
trust law in order to make them lawful, and which 
would have been further in violation of the common 
law. But in those three italicized words lay the sal- 
vation of the trusts. Although no state would empower 
a corporation to defeat the intention of its own stat- 
utes, a state was found to pass an act of incorpora- 
tion which rendered void and of no effect the anti-trust 
laws of every state attempting by statute to preserve 
competition. That state was New Jersey. 

296. The corimration law of New Jersey. — Under the 
provisions of its act, a body of men may form a corpo- 
ration under the laws of New Jersey, which, among 
other manifold privileges, may purchase and own the 
stocks, or otlier property, of any corporation engaged 
in any kind of business in any state, providing the forma- 



THE TRUST PROBLEM 36S 

tion of this corporation does not violate the law of New 
Jersey, on complying with the following easy require- 
ments: (1) To pay a small fee and an annual tax; 
(2) to maintain a principal office in the State of New 
Jersey at the entrance to which the name of their com- 
pany is conspicuously displayed, and where a legal 
representative of the company can be found upon whom 
process may be served; (3) to keep the stock transfer 
books of the company open to inspection of any stock- 
holder at its New Jersey office; (4) to make an annual 
report to the Secretary of State; (5) to hold their an- 
nual stockholders' meeting at the New Jersey office of 
the companj^; and (6) to have as one of their directors 
a resident of New Jersey. 

For momentous consequences, this statute of New 
Jersey is hardly to be equaled in the annals of legislation. 
Sixteen sovereign states had passed searching and strin- 
gent laws in prohibition of any attempt to restrict com- 
petition, laws whose detailed minuteness of specification 
could hardly be improved upon, laws which had been 
effective against the only permanent form of compe- 
tition regulation yet attempted, and which undoubtedly 
represented the conviction of a majority of the people 
of the United States — a conviction finding more general 
and authoritative expression in the Sherman Anti-trust 
Law, and strengthened by the anti-monopoly provision 
of the common law; a well-nigh unanimous sentiment 
opposed to any form of trust or pool; and the little 
State of New Jersey, containing 2 per cent of the 
population and one and three-tenths of the wealth of 
the United States, by the simple act of amending its 
corporation laws, nullified the anti-trust laws of every 
state which had passed them. 

297. Legality of the holding company. — The legal 



36J< ECONOMICS 

position of the holding company was finally established 
by the United States Supreme Court in the case brought 
before it to test the applicability of the Sherman Act 
to the American Sugar Refining Company, which had 
just purchased four competing refineries in Philadel- 
phia. The court held that the Sherman Act applied 
only to interstate commerce, and that "the fact that an 
article is manufactured for export to another state does 
not of itself make it an article of interstate commerce.'* 
The court declared that, were the terms of the act more 
liberall}^ construed, the effect would be to give the 
Federal Government control of nearly all the business 
of the states, a right which it was never intended that 
it should possess. JMoreover, when, as usually happens 
with the industrial trusts, the New Jersey corporation 
owns no property other than the stocks of other corpo- 
rations, the states in which these constituent companies 
are located can attack neither the domestic corporation 
which still preserves its separate existence, nor the New 
Jersey corporation which is acting within the laws of 
the state which created it. The company organized to 
own the stocks or property of other companies proved, 
therefore, to be the solution of the problem presented 
by the hostile attitude of the state legislatures toward 
the trust. Under the joint protection of the state of its 
origin and the Constitution of the United States, and 
secured from interference by the federal courts, the 
trust, as this form of corporate organization, borrowing 
its name from the institution which preceded it, is now 
universally known, could achieve all the purposes of its 
organization without let or hindrance. 

By reconstructing the "trusts" to conform to the law, 
by capitalizing these permanent pools, the builders of 
the trust made possible a widespread reorganization of 



THE TRUST PROBLEM 365 

competitive industry along more profitable lines, and 
opened the way to the creation of the huge mass of 
industrial securities which represent the capitalization 
of manufacturing industry in the United States, from 
participation in whose profits the public had before 
been excluded. With this device of corporate organiza- 
tion, escape from competition was, at least prospectively, 
secured. 

298. The economies of combination. — Before 1898, 
the advantages of restricting competition had come 
to be recognized. A sufiicient number of combinations 
had been formed to familiarize the public with their 
organization and some of the details of their manage- 
ment ; the legal difficulties presented by the various anti- 
trust laws had been surmounted; and, above all, the 
public had reached a firm conviction that the profits 
of combination were enormous. Throughout the hard 
times which followed the panic of 1893, when competing 
manufacturers were gasping for breath, the Standard 
Oil Companies of the several states, and the Sugar, 
Tobacco, and Kubber companies, experienced little in- 
convenience. American Sugar, for example, paid 12 
per cent on its common stock throughout this period, 
and its associates were scarcely less fortunate. Con- 
trolling the production of necessary production goods — 
the demand for which was last to be affected — and se- 
cure from the attrition of competition, these great cor- 
porations presented a startling contrast to the general 
emaciation. Officials of these companies might ascribe 
their large profits to the "economies of combination," 
but the public correctly interpreted this phase of euphony 
to mean the control of the market which the combina- 
tion afforded. "Over-production," "the wastes of com- 
petition," and such like explanations of the industrial 



366 ECONOIMICS 

depression from which the nation was emerging, united 
to emphasize the advantages of consohdation. 

The time was ripe for the universal apphcation of 
the trust principle to manufacturing industries. On the 
one liand, the manufacturer was weary of competition 
and anxious either to combine or sell. On the other 
hand, stood the public, deeply impressed with tlie profits 
of the trust and anxious to buy the shares of industrial 
combinations if opportunity were given. Into this sit- 
uation stepped the promoter, to whom a more promising 
op2)ortunity to sell stocks had never been presented. 

The trust movement had not progressed far before 
cries of extortion and other abuses were raised. This 
leads us to a discussion of the unfair advantages over 
their competitors taken by the trusts. This is the kernel 
of the so-called "trust problem," for it is now generally 
recognized that the problem of the trust lies in its abuses 
and not in the fact of combination itself. 

299. Unfair advantages of the trusts — railroad rates. 
— These may be discussed under three heads of (1) 
unfair railroad rates, (2) charging lew prices where 
there is competition and high where there is none, (3) 
making unfair contracts with retailers. 

Whatever may be the present practice of large 
combinations in reference to unfair railroad rates, 
it is a matter of common knowledge that one of 
the biggest factors in the steady ascendency of 
the Standard Oil Company was its ability to secure 
lower transportation rates than its competitors. That 
discriminations have been a factor in the past in hasten- 
ing centralization in industry is hardly open to question. 
There is a reasonable ground for belief that large ship- 
pers are still being favored by the railroads at the ex- 
pense of the smaller competitors, though this is now more 



THE TRUST PROBLEM 367 

difficult to prove. There is no doubt that this behef Hes 
at the basis of much of the popular hostility to the trust, 
as was witnessed during the famous $29,240,000 line 
case against the Standard Oil Company. It is generally 
felt that the Beef Trust has secured unfair railroad 
rates through its ownership of refrigeration cars on 
which the railroad allows an unreasonably high rental 
deduction. 

300. Discriminating ijrices. — On the subject of local 
price discriminations an abundance of figures are pre- 
sented by the Industrial Commission. There is, in the 
first place, a table of monthly prices of standard illumi- 
nating oils at New York, Chicago and Cincinnati, for the 
fifteen-year period 1885-1899; the table was accom- 
panied by the testimony of Mr. Archbold, and is thus 
above suspicion of prejudice against the Standard Oil 
Company. 

An examination of the table shows that, as a rule, the 
price at Cincinnati v. as lower than at Chicago, and at 
Chicago lower than at New York, which must be ac- 
counted for by some permanent reason. Still it appears 
that on many occasions the situation was reversed. 
Thus, oil was cheaper at New York than at Chicago in 
November, 1887; in February and August, 1888; from 
May to July, 1889, and in November of the same year; 
in September, 1891, and from November of the same 
year to January, 1892; in January, May and October, 
1893, and from December of the same year to Febru- 
ary, 1894; in September of the same year. 

The New York price fell below the price at Cincin- 
nati in September and October, 1888; from August to 
October, 1889, and in December of the same year; in 
February and March, 1893; in March, 1894; in May 
and June and from Au.oust to October, 1895. 



J368 ECONOMICS 

The Chicago price was below that at Cincinnati in 
INIay, June and September, 1892; from April to 
October, 1895; in July, August and October, 1897, and 
in JNlarch, 1898. These fluctuations cannot be adecjuately 
accounted for by any other agency than local fluctua- 
tions of supply and demand. 

In addition to this study of three important markets, 
extending over a number of years, the Industrial Com- 
mission has also a contemporaneous survey of over 
fifteen hundred local markets, representing everj^ state 
in the Union and coming from towns of all varieties of 
size and characteristics. 

The information was received in reply to a schedule 
of inquiries which had been addressed to retail dealers 
throughout the United States. Four articles were 
selected, because of the fairly uniform quality of the 
product — illuminating oil, sugar, salt and Royal Baking 
Powder — and the grocers were requested to give the 
prices paid on February 15, 1901, or on the nearest day 
when purchases of these had been made. Taking 
illuminating oil, variation in price may proceed from one 
of the following causes: (1) Difference in cost of 
production at different sources of supply; (2) freight 
rates; (3) cost of distribution, which is likely to be 
in inverse ratio to the quantity sold in any given market; 
(4) cartage, which is presumably higher in a great city 
like New York than in a small hamlet. The following 
table is constructed from the data of the Commission, 
with a view to eliminating the first two causes of varia- 
tion ; all cities enumerated in the table are supplied by the 
Standard Oil Company from the same refinery, located 
at Whiting, Indiana. The last column shows the net 
price, after deducting freiglit charges; the cities are 
arranged in the order of tlieir [)opulation: 



THE TRUST PROBLEM 



369 



Gross 
Cities Population price Freiglit Net price 

1900 per gal. per gal. per gal. 

San Francisco, Cal 342,783 $0.13- $0.05 $0.08 

Louisville, Ky 304,731 .07 .0074 .0626 

Indianapolis, Ind 169,164 .055 .005 .05 

Kansas City, Mo 163,752 .085 ,017 .068 

St. Paul, Minn 163,065 .08 .013 .067 

Denver, Col 133,859 .16 .049 .111 

Portland, Oregon 90,426 .14 .05 .09 

Seattle, Wash 80,671 .135 .05 .085 

Des Moines, Iowa 62,139 .08 .015 .065 

Lincoln, Neb 40,169 .10 .019 .081 

Little Rock, Ark 38,307 .115 .019 • .096 

Dubuque, Iowa 36,297 .09 .0095 .0805 

Madison, Wis 19,164 .08 .008 .072 

Atchison, Kan 15,729 .095 .017 .078 

Vicksburg, Miss 14,834 .095 ,015 .08 

Cheyenne, Wyo 14,087 .16 .049 .111 

Sioux Falls, S. D 10,266 .105 .018 .087 

Fargo, N. D 9,589 .125 .03 .095 

It is evident from this table that neither the size of 
the market nor the cost of carriage offers a satisfactory 
explanation of the variations in the net prices of oil. 
Here are two cities, Indianapolis and Kansas City, 
substantially alike in population, yet the price at the 
latter is 36 per cent above that at the former. Little 
Rock, Ark., and Dubuque., la., have also substantially 
the sam6 population, and yet the price at Little Rock is 
1.55 cents per gallon above that at Dubuque. VickiS- 
burg, Miss., and Cheyenne, Wyo., are also equal in rank, 
and yet there is a difference of 3.1 cents per gallon, or 
nearly 40 per cent. In a study of the effect of trusts 
on prices, Professor Jenks shows that frequently there 
have been very decided lowerings of the prices of trust 
articles owing to vigorous competition among inde- 
pendents, but that after the source of the price dis- 
turbance had been removed the old prices were restored. 

301. Unfair contracts with retailers. — Under these 

1—24 



370 ECONOMICS 

contracts the trust constrains jobbers and local dealers 
to boycott the products of other producers. Thus it 
was claimed and admitted that the Eiastman Kodak 
Company sold goods at 15 per cent trade discount and 
an additional discount of 12 per cent to dealers who 
handled only their goods. It is claimed that the Tobacco 
Trust as well as the Beef Trust often refused a retailer 
any of its products on the ground that he handled 
goods of competing concerns. It was brought out in 
the recent Supreme Court case which was decided against 
the so-called Wall Paper Trust that the trust endeavored 
to stifle "competition by agreements as to selling prices, 
which A\'ere fixed by the directors, and by refusing to 
sell to any who cut the prices so fixed." 

302. Further causes of popular hostility totvard the 
trusts. — While the above constitutes what one may term 
the three main unfair advantages wliich the trust takes 
of its rivals, they do not explain all that is popularly in- 
cluded in the so-called "trust problem." The basis of 
much of the antagonism to the trust comes from : ( 1 ) 
Its real or fancied ability to charge extortionate prices; 
(2) its influence in politics; and (3) the excessive capi- 
tahzation of many of the trusts. 

First, it is generally conceded that trust prices are 
somewhat higher than those that would obtain under 
com])etitive conditions. The fact that the Standard Oil 
long paid 40 per cent dividends would seem to war- 
rant such a belief. Professor Jenks in his study of 
prices comes to the conclusion that while trust prices 
may not be greatly in excess of what would otherwise be 
the case, they are somewhat higher. 

Second, tliat our tariff's are more often the result 
of log-rolling among tlie big interests than the work of 



THE TRUST PROBLEM 371 

scientific experts in trade and commercial matters is a 
subject of common belief and at the basis of much of the 
prejudice toward the trusts. The tariffs of the past 
liave largely been passed by those deriving- the direct 
benefit from them. Such possibilities do not, in the 
nature of the case, guarantee anything like equal bene- 
fits to all sections of the country, nor is it likely to guard 
the interests of the consumers along with those of the 
producers. 

Third, the corruption of public officials is not a 
practice solely connected with corporations, but it is a 
matter of great import. The dangers that lie in it are 
so great that an aroused public opinion has forced the 
political parties of to-day to make public the source of 
their campaign contributions, and in certain states has 
compelled the railroads to abolish their system of free 
passes. The influence of the railroad over political 
afl'airs is so great as to elicit the following from th<^ pen 
of Professor Fetter: 

The wealth and industrial importance of the railroads give 
them widespread political power in other ways. It is commonly 
charged in some states that the legislature and the courts are 
"owned" by the railroads. The railroads, in part because tl\ey 
are victims at times of blackmail by dishonest pubhc officials, are 
compelled in self-defense to maintain a lobby. The railroad 
lobby, defensive and offensive, is in many states the all-powerful 
"third house." Railroads even have their agents in the pri- 
maries ; they enter political conventions, they dictate nominations 
from the lowest office up to that of the governor, and they elect 
judges and legislators. The extent to which this is done differs 
according as to whether the railroads have large or small inter- 
ests within the state. Plow is this great political problem to be 
met except by an appreciation of its importance and by a growth 
of public integrity ? 



372 ECONOMICS 

The following quotation from a conservative source is 
hardly less positive: 

Corporate officials, moreover, do not hesitate to do things in 
the name and under cover of their corporations which they would 
be ashamed to perform openly for themselves. In the United 
States, corporations have been guilty of buying legislatures, cor- 
rupting judges, bribing juries, entering into agreements with 
political parties, insuring them certain privileges in return for 
campaign contributions, and in fact, of every sin of the political 
calendar. It is owing largely to them that the tone not only 
of business, but of political morality is much below the standards 
of private life. *. 

303. Stock manipulation. — The last way which we 
shall discuss in which the corporation affects the interests 
of the public is in reference to stock manipulation. This 
is a matter of most far-reaching consequences. Yearl}^ 
millions of dollars pass from the hands of innocent in- 
vestors to swell the coffers of those "on the inside" who 
either know how to manipulate the market, or else have 
knowledge in their possession from which the public is 
debarred and by which the "insiders" may profit. Too 
few are the corporations whose securities are listed on 
the stock market, which issue financial statements from 
which the investing public can gain adequate knowledge 
for a safe investment. The stock market is continually 
subject to influences causing a rising or falling market, 
which periodically seems to reach a climax in a panic. 
A panic, news of bank failure, or sometimes a 
maliciously circulated rumor starts the price of stocks 
to falling. Those "on the inside" realize that the time to 
buy certain stocks is when, after the stock market has 
been falling for some time, it has about reached its 
lowest point. The small investor — the man who has 



TPIE TliUST PROBLEM 373 

invested all his earnings, accumulated after years of toil, 
or the woman who has gathered together a few thousand 
dollars from dressmaking, or teaching, and put her all 
into buying stocks which she has every reason to consider 
safe — becomes frightened and sells for fear the price 
of the stock may even go lower. If they paid $50 per 
share, they may be glad to throw it on the market at 
$25 for fear of being compelled later on to accept $15. 
Meanwhile, those on the "inside" knowing the intrinsic 
value of the stock, from knowledge which they alone 
possess, and knowing that its price is bound soon to rise 
again, are quietly buying all the stock they can get their 
hands on. Stock that formerly sold for $100 they may 
perhaps buy at $40. 

Then the tide on the stock market begins to turn, 
and the prices begin gradually to climb up again. 
Sometimes it is the result of a general return of pros- 
perity. Sometimes, on the other hand, a fictitious value 
is given to stock by paying dividends out of earnings 
that should have been expended for renewals and re- 
placements, or through a padded balance sheet. On a 
rising market those "on the inside" gradually unload 
their stock at double or triple the price and wait for the 
next falling market to buy back perhaps the same stock 
at a half or a third of its recent price. If one "on the 
inside" puts a million in stock on such a deal, it only 
requires a comparatively short time before he has two 
millions in its place. 

If a corporation makes a million of profits in a year 
the community has something to show for it in the line of 
railroads built, bridges constructed, houses erected, or 
food produced; but if those "on the inside" make a 
million in a year, the community has nothing to show 



374! ECONOMICS 

for it but a number of homes in which the security of 
old age has been wiped away and the present standard 
of living lowered. 

• 304. History of trust legislation. — The history of 
legislation framed to correct the abuses on monopoly 
power on the part of industrial combinations resembles 
the record of acts passed to curb the growing strength 
of the railroads. In both cases state action preceded 
federal action, and repeated amendments to the national 
law have been urged or passed. 

The first anti-trust laws M^ere those passed by the 
various states; Kansas took the lead by passing a law 
against business corporations in 1889. She was joined 
by a small number of states the same year. In the first 
half of 1890 three more states joined the movement. 
In July of that year the Federal Anti-Trust Act, pop- 
ularly known as the Sherman Law, was passed. Since 
then many states followed the examples of their sis- 
ters, and of the federal government, and passed anti- 
trust laws until upward of thirty legislatures have 
passed laws on the subject. These various state meas- 
ures were similar in most respects in that they made 
persons engaged in any combination in restraint of 
trade liable to fine and imprisonment, and the corpo- 
rations or firms punishable by loss of charter or of 
right to carry on business within the state where the 
offense is committed. The United States Su])reme 
Court held that tliese laws, applied to any combinations, 
wliether tliey formed a ])artial /)r complete monopoly, 
were decidedly inecjuitable. It is now pretty generally 
conceded that these state laws failed in being too 
drastic. If they had been enforced to the full letter of 
the law, much business would have been [)aralyzed. 

305. The Sherman Anti- Trust Act. — The Sherman 



THE TRUST PROBLEM 375 

Act of 1890 declares that "every contract, combination 
in the form of a trust or otherwise, or conspiracy in re- 
straint of trade, or commerce among the several states or 
with foreign nations, is illegal," and that "every person 
who shall monopolize or attempt to monopolize, or com- 
bine or conspire with any other person to monopolize, 
any part of th^ trade or commerce among the several 
states or with foreign nations, shall be deemed guilty 
of a misdemeanor, and on conviction thereof shall be 
punished by fine not exceeding $5,000 or by imprison- 
ment not exceeding one year, or both said punishments 
in the discretion of the court." 

306. Enforcement of the Sherman Act. — Because the 
legislative authority in the United States is organized 
on a dual system of National and state sovereignties, the 
Sherman Anti-Trust Act, although intended to prevent 
industrial combinations, was at first effectively applied 
only in the case of railroads and trade unions. 
The notable instance of this latter was the sup- 
pression of the Chicago Railroad strike in 1894, 
under the provisions of the Federal Anti-Trust Act. 
This peculiar situation arises from two facts: First, 
that under the Constitution of the United States Con- 
gress has control over the commerce between the states. 
Interstate commerce is interpreted by the United States 
Supreme Court as "intercourse and traffic between the 
citizens or inhabitants of different states," including 
"not only the transportation of persons and property, 
but also the purchase, sale, and exchange of com- 
modities." By the terms of the Constitution, the states 
are barred from any attempt at the regulation of 
interstate commerce. Second, that under the court's 
definition of interstate commerce, the business of manu- 
facturing is not included. In so far as the trust is 



376 ECONO.AIICS 

usually a manufacturing concern, this important part of 
its activities comes under jurisdiction of state authority. 
As engaging in interstate commerce, the trust is 
amenable to the federal government; as a manufactur- 
ing concern it is amenable to the state only in which it is 
located. This situation has made it difficult for Con- 
gress to exercise anj^ efficient control over the trusts. 
The interstate commerce in which they are engaged and 
over which the Constitution gives Congress control, may 
be so carried on as to evade practically any prohibition 
that Congress could make without putting a serious 
clieck on all interstate commerce. 

The states, on the other hand, are almost as powerless, 
for although they can control the manufacturing of 
trust products within their domains, they cannot prevent 
trusts organized under the laws of other states, and 
having their plants outside of the states, from shipping 
their products into the state. If they attempted this 
they would be interfering with interstate commerce, 
which is strictly prohibited by the Constitution of the 
United States. Furthermore, outside the question of 
legality, any plan of control which rested on state action 
would probably have the weakness of a lack of uni- 
formity. A chain is no stronger than its weakest link, 
and so any series of laws passed by the various states 
would be no more efficient than the regulation in the 
\A'eakest state. This is at present a problem that has not 
yet been solved. A state may so liberalize its corpora- 
tion laws as to afford a veritable asylum for certain 
trusts; it may even authorize the corporation to do 
business in every state in the Union except its own, and 
the other states are powerless to keep out its products, 
for such an attempt would constitute an interference 
with interstate commerce. The states with the most 



THE TRUST PROBLEM 377 

indulgent policies have been New Jersey, Delaware and 
West Virginia. The usual inducements which are held 
out consist of light incorporation fees and taxes, the 
absence of specifications as to character of business or 
amount of capital stock.. About 95 per cent of existing 
corporations hold charters granted by one of these three 
states. Such is the present condition of trust control, 
or rather the lack of it, with the exception of the im- 
portant step forward which was taken when the Depart- 
ment of Commerce and Industry was created in 1903. 

307. The Bureau of Corporations. — This new de- 
parture in the line of corporation control aims at correct- 
ing certain trust abuses through publicity. Under the 
above-mentioned department is the Bureau of Corpora- 
tions, which is charged "to make diligent investigation 
into the organization, conduct and management, of the 
business of any corporation, joint stock company, or cor- 
porate combination engaged in commerce among the 
several states or with foreign nations, excepting common 
carriers . . . and to gather such information and 
data as will enable the President of the United States to 
make recommendation to Congress for legislation for the 
regulation of such commerce." 

At the head of this bureau stands the Commissioner of 
Corporations, who is authorized to subpcena witnesses 
and to examine whatever books and papers of the trusts 
are necessary for him to carry out fully the functions 
of his office. Among the other things which this new 
department of government has accomplished have been a 
Report of the Beef Industry, and also the quite recent 
official investigation on the Transportation of Pe- 
troleum. 

308. Future of the tnist problem.- — It may not be out 
of place to note that the field of possible future legisla- 



378 ECONOMICS 

tioii is narrowed down to three distinct propositions. 
First, there is incorporation under federal law. Such 
a law would have to be purely voluntary, but it is held 
that enough inducements in the line of legal privileges 
and immunities could be held out to cause all future 
corporations to take out federal, instead of state 
charters, and to cause many now incorporated under 
state laws to change their charters. The second plan is 
similar to the first. It proposes a federal franchise or 
license for permission to engage in interstate commerce. 
Prohibiting such commerce to all unauthorized corpora- 
tions would practically bring all those of anj^ magnitude 
under federal supervision. 

The third plan proposes reasonable publicity. The 
advocates of this plan see in publicity a means of re- 
vealing the existence of abnormal income, or other con- 
ditions now kept from the investing public. The 
establishment of the United States Bureau of Corpora- 
tions has been a step in this direction. Many feel that 
the work in this direction should be extended, and that 
the information gathered by this bm-eau should, within 
reasonable limits, be open to the public as well as to the 
President of the United States. One thing is certain, 
to the future belongs the task of passing laws that are 
adequate to solve the momentous questions which the 
cor])oration and trust have brought us. 

The decisions of the United States Supreme Court in 
1911 in the cases against the Standard Oil and Tobacco 
Trusts, by the terms of which these great combinations 
were compelled to dissolve, illustrate forcibly the great 
importance of this trust problem. 



CHAPTER IV 

PROBLEM OF MONOPOLY 

309. Nature of monopoly. — One of the most interest- 
ing problems of economics, as well as one on which there 
is the greatest difference of authoritative opinion, is that 
of monopoly. The problem of the trust and that of 
monopoly should not be confused in thought as identical. 
Though they usually go hand in hand, one may exist 
without the other. Monopoly is the broader term of the 
two and applies equally to the power by which labor 
unions are able to force up wages as well as to the power 
which enables railroads "to charge what the traffic will 
bear" or the trust to reap monopoly profits. 

In the popular mind, monopoly is an evil to be 
destroyed whenever met. It is quite generally believed 
that the unrestricted exercise of monopoly power can not 
but result in social injury. Its presence suggests some 
form of exploitation. This view is furthermore not 
limited to the lay mind. In the eyes of some economists 
of note "monopoly checks progress in production and 
infuses into distribution an element of robbery." In 
their eyes monopoly is like some foreign substance which 
may get into the industrial mechanisrn and prevent its 
perfect running. Whenever this hap]3ens the only wise 
course is to remove the cause of such friction. This can 
only be done by restoring once more a condition of free 
competition. By this method, industry is once more 
restored to its normal condition. Economists who hold 
this view of monoply believe that there are certain 

379 



380 ECONOMICS 

fundamental laws in economics which are as universyl 
and permanent as the law of gravitation itself. They 
maintain that these laws should be allowed to operate 
unimpeded by any distributing forces such as monopoly 
and that if they are allowed so to operate, each factor in 
production will get its just share of the products of 
industry. Such theory of distribution is based on a be- 
lief in a natural law of justice which rewards every 
man according to his merits. It implies a complete 
absence of all forms of monopoly. Under such a 
system, the only prices which it is just to charge either 
for services or commodities are "cost" prices, i. e., prices 
in which there is no monopoly element. 

310. Monopoly a universal phenomeiion. — Those who 
oppose this general view of monopoly contend that there 
is nothing inlierently wrong in the principle of mo- 
nopoly, that it is a general phenomenon of all economic 
activities and that practically everybody, laborer, pro- 
fessional man, capitalist and landlord, is a monopolist. 
In their view, monopoly is the power which enables a 
man to raise the price of his services or his commodities 
above that which they "cost" him. A monopolist is, 
therefore, any one who fixes his price solely with his eye 
on the market, who sells without having in view any other 
consideration than his own interest, in other words, one 
who "charges what the traffic will bear." Under this 
definition of monopoly the corner grocer who adds a few 
extra pennies to the price of his articles, because he 
knows that his customers will pay it rather than go four 
or five blocks elsewhere, is as much a monopolist as a 
coal baron. They are monopolists in kind, if not in 
degree. According to this view, practically every one is 
a monopolist. Though the extreme concentration of 
monopoly power in the hands of some may give rise to 



PROBLEM OF MONOPOLY; 381 

serious problems, the monopoly principle, nevertheless, 
pervades the whole business world, and is not to be con- 
demned on all hands because it may sometimes give rise 
to evil results. 

311. Monopoly accompanies progress. — According to 
this school of thought, monopoly is an inevitable result 
of progress, and civilization. This truth can best be 
seen by showing the relation existing between the 
monopoly fund and the social surplus. One hundred 
and fifty years ago, before the great Industrial Revolu- 
tion in England, man's productive power was, relatively 
speaking, very small. With the great inventions of that 
period and those subsequently made, with the discoveries 
of steam and electric power, and their application to 
industry, with these and like improvements in the arts 
and sciences, man's productive power has been multiplied 
from ten to a hundred fold. With the same amount of 
capital expressed in terms of dollars and cents, and 
the same amount of human effort man can to-day 
produce a hundred units of product where formerly he 
produced but ten. The difference in the productive 
capacity of the two periods is the result of the growth 
of the social surplus. If all the products of industry 
to-day were apportioned among all the persons who 
were responsible for their creation, no small amount 
would have to go to the inventors, discoverers and others 
of the past who have so largely made possible our pres- 
ent high productive power. In the words of Mr. Car- 
negie, in a recently published essay on "Wealth": "In 
the world's progress, scientific discoverers and mechan- 
ical inventors appeared and adapted the forces and 
materials of nature to the uses of man, followed by 
the commercial and industrial age in which we live, in 
which wealth has been produced as if by magic, and 



382 ECONOMICS 

fallen largely to the captains of industry, greatly to 
their own surprise. JNIulti-millionaires, a new genus, 
have appeared, laden with fortunes of such magnitude 
as the past knew nothing of." 

It has heen almost the universal rule of history that 
the great henefactors of mankind, the inventors and 
discoverers, have died, with few exceptions, pooV men. 
Much of the present wealth produced is in reality due 
to the past, hut the past is gone and it is therefore not 
in a position to present a claim on the present products 
of industry as just as such a claim might be. The 
present wealth can only be consumed by the present 
participants in production. This means that every one 
who is getting some of the product of this social surplus 
is in reality getting something for which he has not 
rendered an equivalent service. In so far he is a monop- 
olist because he has departed from the standard of "cost" 
prices. The social surplus affords thus a kind of 
monopoly fund on which all the present factors of pro- 
duction are constantly drawing. One group of capital- 
ists tries to increase the share of this fund which it 
receives by forcing up the price of its particular com- 
modity. If they succeed, another group of monopolists 
must lose some of the share which they formerly got. 
If labor is able to combine and successfully raise their 
wages they are increasing the share of this monopoly 
fund that they receive and some other group of monop- 
olists suffer a corresponding loss. 

Thus, it is contended, monopoly is never destroyed 
but merely shifted from one group to another or divided 
between them on a new basis. It by no means follows 
that if railroads were forced to reduce their freiglit 
rates to the lowest possible level that the price of com- 
modities transported would fall as a result, or that 



PROBLEM OF MONOPOLY 383 

monopoly would be destroyed. A fall in freight rates 
would merely result in an increase in the value of western 
farm lands. Part of the income of society would 
thereby be shifted from one monopoly, the railroad, to 
another monopoly, the landowner or landlord. Or, to 
take another illustration of the same principle, if the 
fare on trollej^s running into a suburban district is low- 
ered, it by no means follows that a man renting a house 
in the suburbs will be any better off financially at the 
end of the month. Because of the lowered fares, his 
section of the country now becomes more desirable for 
homes. Rents increase and instead of paying an extra 
dollar or two to the railroad monopoly, he now pays it 
to his landlord. 

One thus comes to see that monopoly power is well 
nigh universal. There are but few classes of society, 
nay, rather few individuals in any class, who have not 
been able to get and to keep some portion of the social 
surplus. 

312. One monopoly feeds on another. — We may now 
clearly see the nature of the monopoly problem. Cer- 
tain classes in the community have obtained more of 
the social surplus than others. This they have obtained 
through the larger control which they exert over supply, 
that is to say, through their superior monopoly power. 
The American Sugar Refining Company, or the Amer- 
ican Tobacco Company, or the Standard Oil Company 
obtains an advantage over Michael Hertzka, coal miner, 
because it can exercise a larger control over the supply 
of its commodities than Michael Hertzka can exert over 
the supply of his labor, and can, therefore, maintain a 
higher net income from selling sugar, tobacco, or 
petroleum than Hertzka can obtain from selling his 
labor. 



384 ECONOMICS 

In times of depression, when the social purchasing 
power is reduced, the great companies can reduce their 
output, and maintain the price of their products at a 
higher level than the price of the labor of the coal-miner, 
which may, at such a time, entirely vanish. In the same 
way, when prosperity returns, and the social income 
increases, the price of sugar, tobacco and oil rises much 
more quickly and much higher than the wages of the 
coal-miner. In this way, by their superior control over 
supply, the industrial combinations take from the la- 
borer, the farmer, the small artisan, the man on a salary 
— from every man whose control over the supply of 
labor or goods is less absolute than theirs — a part of 
the free income which these factors would obtain but for 
the fact that, as compared with the trusts, their control 
over the supply is feeble and ineffective. 

313. Some 'would apportion the social surplus by 
laxv. — JNIany serious students of the problem feel that 
there can be no equalizing of the distribution of the 
social surplus without calling on the government to set 
things right by establishing "cost" prices. They ac- 
cordingly advocate giving to the Interstate Commerce 
Commission or some like body the rate-making power 
over the railroad so that "cost" prices for transporta- 
tion may obtain and all railroad stock dividends arising 
from monopoly power be prevented. They likewise 
believe that there is a "natural law" for all wages and 
that the government should ascertain this natural wage 
by arbitration commissions. "The state is bound to 
ascertain and declare >vhat rate is just, to confirm the 
workers in their positions when they accept it, and to 
cause them to forfeit their right of tenure if they 
refuse it. If the workers thus forfeit their claim, 
their positions are clearly open to whoever will take 



PROBLEM OF iMONOPOLY 385 

tlieni, and the state is bound to protect the men who 
do this." 

314. Objections to government regulation of prices. 
— Those who take the opposing view of monopoly feel 
that it is illogical for the goverimient to establish prices 
on a "cost" basis in some cases and not generally. They 
point out that there are at least four classes of property 
that gain a relatively large share of the social surplus, 
namelj^ the railroads, protected industries, western 
farms and city land. Why not be logical and have 
the government establish "cost prices" for at least these 
four groups? But herein lies the weakness of the whole 
scheme of government regulation. To carry out the 
principle of "cost" prices to anything like its logical 
extent means a task too big and too complex to be 
considered for a moment. It is wiser to recognize 
monopoly as a general phenomenon not necessarily an 
evil in itself, but capable of leading to evil. Instead 
of destroying the strong monopolists, the aim should 
be to strengthen the weaker ones so that they may get 
their share of the social surplus. Instead of saying 
to the railroads and the farmers, "you shall each receive 
such and such returns," it is more practical to allow 
them to adjust the matter between themselves. Instead 
of saying to labor, "you shall receive such and such a 
wage, guaranteed to you by law" — it is wiser to en- 
courage them to increase their monopoly power by more 
thorough unionization and thus get in line for their 
share of the social surplus. The whole problem is essen- 
tially one of equalizing monopoly power. 

315. The interest of consumers in prices. — It may be 
asked, has not the general public, or at least the con- 
sumer's interests, been ignored in such a view of the 
case? Are there no restraints in operation to protect his 

1—25 



386 ECONOMICS 

interests? There is a general protection in the fact that 
monopoHes feed on each other, so to speak. If one 
monopoly gains, another loses. In addition to this, 
there are other limitations on the power of monopoly: 
(1) The extension of the principle of combination to 
include every industry and all occupations — the univer- 
salization of the tendency to consolidation; and (2) the 
substitution of one good for another, an advance in 
price being met by a change in the direction of demand. 
The trust movement of recent years, which has con- 
solidated the industries of mining and manufacturing, 
should not be deplored as a social disaster. It should 
be hailed rather as a social gain, for it has meant a 
closer approach to an equality of monopoly power. In 
these lines before the inception of the trust movement, 
firms and companies were to be found widely differing 
in their capacity for economical production. The 
stronger concerns with the best plants and the latest 
improvements enjoyed a considerable advantage over 
their weaker competitors. Charging the same price, 
they were able, through their lower cost of production, 
to make a large profit, in short, to get for themselves 
a disproportionate share of such monopoly profits as 
accrued to the industry to which they belonged. The 
inclusion of all these plants, botji small and great, under 
the consolidation of a trust, has tended to equalize this 
advantage and to distribute more widely the increment 
of monopoly gains. The growth of industrial com- 
bination, so far from concentrating, has more widely 
difi^used the power of monojioly, and has equalized the 
economic advantages which arise from its possession. 
Producers who were formerly sufferers from mono2)oly 
power have now been permanently relieved. They have 
been taken into the inner circle, and have been admitted 



PROBLEM OF MONOPOLY 387 

to a share of monopoly power wliicli, under the regime 
of free competition, they could- not have obtained. 

316. The consumer may also he a stockholder. — It 
may be contended, however, that the gains to producers 
from the organization of the trusts have been offset by 
the losses which the consumers have suffered. On the 
one side, stand the manufacturers and mine owners, a 
comparatively small body, firmly organized into large 
consolidations. On the other side are found the work- 
ingmen, the farmers, and the professional men — ninety- 
nine out of every hundred of the population. These 
are the consumers, and it is from them that the social 
surplus is extorted. Here, it is claimed, is the real 
menace of the trust. 

The consumer, however, has other safeguards against 
the power of monopoly. Owing to the corporate form 
which all industries have now assumed, and to the growth 
of the investment habit, he rnay, as a stockholder, par- 
ticipate in the monopoly gains from which, as a 
consumer, he may suffer. The wide diffusion of 
corporation securities is a phenomenon whose existence 
is not generally known, but which comes to the surface 
in an unmistakable way whenever hostile legislation 
threatens corporate profits. In Philadelphia, for ex- 
ample, it is estimated that fully 50,000 voters are stock- 
holders in the municipal monopolies of that city. 
Probably one-fourth of the people of Philadelphia are 
directly interested in the monopoly profits to which, as 
consumers, they contribute. The same policy has long 
been pursued by the railroads, which have been ma- 
terially assisted by the savings fund institutions, par- 
ticularly in the state of New York, where savings banks 
and trust companies are allowed to invest their funds 
in approved corporation securities. 



388 ECONOIMICS 

The advocates of state socialism would do well to 
look about them. While they advocate the ownership 
of natural monopolies by the people, the people have 
it in their power to take possession as individuals, 
through the purchase of corporate securities. This 
movement toward public ownership — for such in fact it 
is— will progress with the general increase in incomes; 
and in this way the gains of monopoly will be diffused 
among an ever-widening circle of shareholders. Again 
must the trust movement be commended; because, by 
bringing all manufacturing industry into the corporate 
form, and hence, imparting to its future a strength and 
stability which isolated heterogeneity would never have 
allowed, it has admitted the whole people to share in 
monopoly profits. As consumers, their free income 
may be taken from them in the price of commodities; 
but this is straightway handed back to them in the form 
of dividends. 

Not only as shareholders in existing monopolies may 
the consumers be compensated for the loss of their free 
income, but as producers, they may form organizations 
to dispute for its possession, and force a more equal 
division. The possibilities of consolidation are almost 
infinite. 

- 317. The problem is to universalize monopoly power. 
— The universalization of monopoly power, and, by con- 
se(}uence, a closer approach to equality of monopoly 
advantage, is already in sight. When all producers are 
closely organized the supply of every commodity will be 
firmly controlled. What is taken from the laboring 
man in the price of oil, sugar and coffee, will he restored 
to him in a higher rate of wages. AVhat the farmer 
loses in the price of barbed wire and binding twine, will 
be restored to him in the jirice of wheat. When all 



PROBLEM OF MONOPOLY 389 

the productive factors stand on an equal footing, no 
one will be able to gain any considerable advantage over 
any other. This monopoly power will never be equally 
distributed. To expect this would be visionary. But 
conclusive evidence, accumulating on every hand and in 
every industry, points to the conclusion that the solution 
of the problem lies not in the abolition or even the cur- 
tailment of monopoly power, but in its general distri- 
bution throughout all classes of society. 

318. The power of substitution. — But the consumer 
need not rely upon these means of protection against 
the power of monopoly. He has a more effective 
remed}^ constantly at hand, in the power of substitution 
— a remedy whose application, though requiring a 
modicum of intelligence, is instantly effective. The 
sympathetic movement of prices has long been clearly 
perceived. The prices of wheat, corn and oats move 
together, no matter in which grain the initial disturbance 
of the supply and demand relation may have occurred. 
The prices of all products which are interchangeable in 
their uses fall in unison. 

The application of this law of the sympathetic price 
movement of substitutes has not been made to the prob- 
lem of monopoly, yet its application is plain and obvious. 
Let us proceed by illustration. The monopoly of the 
anthracite -coal industry has been already referred to. 
From 1880 to 1898, while general prices fell 40 per cent, 
the price of anthracite coal at Philadelphia declined from 
$4.53 to $3.75 or 17 per cent. The consumer was taxed 
more and more heavily by the coal trust. How did 
he escape from this situation? By the use of bituminous 
coal. The almost unlimited area of soft, coal land 
enabled the supply to be increased at will. During 
this same period, 1880-1898, the price of bituminous 



390 ECONOMICS 

coal in the United States decreased from $3.75 to $1.60 
per ton, or 60 per cent, the result of an increase in its 
supply from 38,200,000 tons in 1880 to 1-18,700,000 
tons in 1898, an increase in per capita consumption of 
from .76 tons in 1880 to 2 tons in 1898. During the 
same period the production of anthracite coal increased 
only from 25,500,000 tons in 1880 to 47,600,000 tons in 
1898, an increase in per capita consumption of from 
.5 ton in 1880 to .6 ton in 1898, or 20 per cent as com- 
pared with an increase in the per capita consumption 
of bituminous coal of 163 per cent. 

In other words, during this period of 18 years, the 
per capita consumption of bituminous coal increased 
eight times as rapidly as the consumption of anthracite. 
A constantly increasing proportion of the population 
have abandoned or decreased their consimiption of the 
monopolized fuel in favor of a cheaper substitute. 
Along the same line has come the substitution of crushed 
coke for anthracite coal, and the use of gas and petro- 
leum as fuel. No better illustration of the effectiveness 
of the power of substitution to curb the power of mo- 
nopoly could be asked for. 

319. The power of substitution and the price of oil. — 
The Standard Oil Company is a monopoly. It has al- 
most absolute control over the price of refined petroleum, 
and can fix its price at the point of largest monopoly 
revenue. But this power can only be exercised to the 
fullest extent in the country and in the smaller towns. 
On approaching a gas tank or an electric light plant, 
the price of oil at once declines. The general substitu- 
tion of gas for oil depends merely on the continuance 
of the growth of towns into cities and of liamlets into 
towns. Soft coal is everywliere abundant, and gas can 
be manufactured at a low price. A few companies, like 



PROBLEM OF MONOPOLY 391 

the United Gas Improvement Company of Philadel- 
phia, have consciously adopted this policy of substitu- 
tion, and are rapidly introducing" gas as a substitute 
for anthracite coal and petroleum. 

During one of the recent occasions when the price of 
meat soared to heights that were prohibitive for a great 
many families, so many persons reduced their daily con- 
sumption of meat by substituting other articles of diet 
for it, that the Beef Trust suffered a loss never to be 
made up again. People came to see that they could get 
along on a diet in which meat did not figure three times 
a day and still keep well, and now when prices soar, 
the diet of the average person adapts itself accordingly. 

Examples of the power of substitution could be 
indefinitely multiplied. The price of wool is a mo- 
nopoly price, from whose incidence there seemed to be 
no way of escape ; yet a recent estimate of the National 
Association of Wool Manufacturers states that the per 
capita consumption of wool in the grease has decreased 
from 9.07 pounds in 1890 to 6.7 pounds in 1900, and to 
6.4 in 1910, due to substitution of cotton. The monopolj^ 
of the copper trust is threatened by the solution of the 
problem of leaching copper direct from the ore, without 
the long and expensive operations of roasting and smelt- 
ing, which confine production to a comparatively small 
area of high-grade ores easy to be controlled. 

There is no need of further illustration. No mo- 
nopoly is secure in its control, for no monopoly can be 
protected against the power of substitution. Until 
bounds are set to the power of invention, and until the 
possibilities of natural resources are strictly limited, we 
can never be in serious danger from the tax of monop- 
oly prices. It is true that the exercise of this power 
of substitution implies a degree of discernment not gen- 



390 ECONOMICS 



4 



coal in the United States decreased from $3.75 to $1.60 
per ton, or 60 per cent, the result of an increase in its 
supplj^ from 38,200,000 tons in 1880 to 148,700,000 
tons in 1898, an increase in per capita consumption of 
from .76 tons in 1880 to 2 tons in 1898. During the 
same period the production of anthracite coal increased 
only from 25,500,000 tons in 1880 to 47,600,000 tons in 
1898, an increase in per capita consumption of from 
.5 ton in 1880 to .6 ton in 1898, or 20 per cent as com- 
pared with an increase in the per capita consumption 
of bituminous coal of 163 per cent. 

In other words, during this period of 18 years, the 
per capita consumption of bituminous coal increased 
eight times as rapidly as the consumption of anthracite. 
A constantly increasing proportion of the population 
liave abandoned or decreased their consumption of the 
monopolized fuel in favor of a cheaper substitute. 
Along the same line has come the substitution of crushed 
coke for anthracite coal, and the use of gas and petro- 
leum as fuel. No better illustration of the effectiveness 
of the power of substitution to curb the power of mo- 
nopoly could be asked for. 

319. The power of substiUition and the price of oil. — 
The Standard Oil Company is a monopoly. It has al- 
most absolute control over the price of refined petroleum, 
and can fix its price at the point of largest monopoly 
revenue. But this power can only be exercised to the 
fullest extent in the country and in the smaller towns. 
On approaching a gas tank or an electric light plant, 
the price of oil at once declines. The general substitu- 
tion of gas for oil depends merely on the continuance 
of the growth of towns into cities and of hamlets into 
towns. wSoft coal is everywhere abundant, and gas can 
be manufactured at a low price. A few companies, like 



PROBLEIM OF MONOPOLY 391 

the United Gas Improvement Company of Philadel- 
phia, have consciously adopted this policy of substitu- 
tion, and are rapidly introducing gas as a substitute 
for anthracite coal and petroleum. 

During one of the recent occasions when the price of 
meat soared to heights that were prohibitive for a great 
many families, so many persons reduced their daily con- 
sumption of meat by substituting other articles of diet 
for it, that the Beef Trust suffered a loss never to be 
made up again. People came to see that they could get 
along on a diet in which meat did not figure three times 
a day and still keep well, and now when prices soar, 
the diet of the average person adapts itself accordingly. 

Examples of the power of substitution could be 
indefinitely multiplied. The price of wool is a mo- 
nopoly price, from whose incidence there seemed to be 
no way of escape ; yet a recent estimate of the National 
Association of Wool Manufacturers states that the per 
capita consumption of wool in the grease has decreased 
from 9.07 pounds in 1890 to 6.7 pounds in 1900, and to 
6.4 in 1910, due to substitution of cotton. The monopolj^ 
of the copper trust is threatened by the solution of the 
problem of leaching copper direct from the ore, without 
the long and expensive operations of roasting and smelt- 
ing, which confine production to a comparatively small 
area of high-grade ores easy to be controlled. 

There is no need of further illustration. No mo- 
nopoly is secure in its control, for no monopoly can be 
protected against the power of substitution. Until 
bounds are set to the power of invention, and until the 
possibilities of natural resources are strictly limited, we 
can never be in serious danger from the tax of monop- 
oly prices. It is true that the exercise of this power 
of substitution implies a degree of discernment not gen- 



392 ECONOMICS 

erally possessed up to this time; but the rapid introduc- 
tion of substitutes witliin the last few years, among all 
classes of consumers, and the fact that many of these 
substitutes exert their influence upon prices in the field 
of capital goods, where the people are trained to dis- 
cover and appreciate them, assure us that the general 
limitation of the power of monopoly by the power of 
substitution will not be long delayed. 

320. Social welfare may occasionalhj compel govern- 
ment regulation of prices. — There remains but one 
phase of the general monopoly problem to be discussed. 
Though one maj^ believe that monopoly is a universal 
phenomenon and that it is so big a problem that no 
l^olitical party or government could logically carry out 
a program of establishing "cost" prices on all hands, 
should one always on that account oppose on general 
principles any attempt to regulate prices? In a pre- 
vious illustration in which a decrease in car fares was 
shown to result in an increase in suburban rents, though 
the people renting houses out of town found that they 
had no more in their pocketbook at the end of the month, 
under one system or the other, the same people did nev- 
ertheless gain by the change. I>fOw fares induce people 
to buihl their homes over a wider area. They mean less 
congestion. This is a social gain. Reduced rates for 
school children would come under the same head. A 
person might thus conceivably favor a law making pos- 
sible lower fares in congested districts or school tickets 
for cliildren without advocating the introduction of a 
general regime of "cost" prices. In the one case the 
connection between social welfare and a lower rate is 
obvious to all. I'ublic opinion in such a case may be 
crystallized so as to demand a degree of price regulation. 
It is done, however, not as a part of a general campaign 



PROBLEM OF MONOPOLY 393 

against all monopoly wherever found, but as a measure 
whose end is first and last, social welfare. Its object 
is not to establish "cost" prices but merely to lower a 
particular rate of charges because of the obvious benefits 
that would follow. 

The general uneasiness excited by the growth of the trusts dur- 
ing the earlier years of the movement has, in the light of experi- 
ence, somewhat abated. It is now recognized that the trust form 
of organization is adapted to rather a limited number of busi- 
nesses, and that only in a few cases can combination actually suc- 
ceed for any length of time in suppressing competition. At the 
same time, the reasons for the success of those trusts which have 
succeeded are coming to be more generally understood and public 
opinion is being educated to discriminate between the legitimate 
and illegitimate practices of the combinations. The future of 
the trusts in the United States depends very largely upon the 
promptness with which unfair methods of competition are pre- 
vented. If effective measures are taken to prevent rate dis- 
criminations on the part of the transportation companies and 
price discriminations and unfair contracts with retailers on the 
part of the trusts themselves, it is believed that the movement 
towards combination will be checked, and that such combinations 
as continue to be effected will have back of them reasons not 
opposed to public policy. For behind the trust movement are 
more solid and creditable motives than the activity of unscrupu- 
lous promoters and the monopoly hunger of greedy manufactur- 
ers. The economies of combination are in many cases both real 
and substantial and a public policy that opposes all forms of 
combination is as unenlightened as it must in the long run be 
futile. 

The most effective weapon wielded by the public for dealing 
with the trusts, as with other actual and potential monopolies, 
is the consumer's power to substitute other goods for those which 
the trusts enhance in price. As consumption and processes of 
production become more varied in their range, this power ac- 
quires wider scope. It already effectually precludes excessive 




394* ECONOMICS 

profits to any very large number of businesses and limits the 
monopoly problem to those few services and commodities which 
remain indispensable to civilized existence, such as transportation 
facilities, coal, iron, petroleum, salt, sugar, etc. As time goes 
on, invention and discovery may still further narrow the list 
of such articles and services, but probably never to such an extent 
as to make the monopoly problem one of little importance to the 
economist. — H. R. Seager, "Economics: Briefer Course," pp. 
420-422. 



CHAPTER V 

SOCIALISM 

321. Social unrest. — As great as our resources are in 
this country and as great as our prosperity is, few will 
contend that we have in America as high a civilization 
as we are entitled to. There exists in this country un- 
mistakable marks of a vast amount-of social unrest. 
And this social unrest will probably continue to exist 
just as long as every large city must face its poverty 
problem, just so long as men die in their prime, leaving 
wives and children in .danger of want, and just so long 
as accidents, many of which are preventable, make an 
army of maimed dependents. Though as a nation we 
are still in our youth, we have already developed the 
problems of child labor, over-work and congestion. 
Though the socialist is by no means the only one who 
protests against these conditions nor the only one who 
has a program for their amelioration, the name socialism 
has become so much of a household word as to merit 
more than passing attention in this connection. 

The recent growth of socialism is one of the impor- 
tant phenomena of modern times. Although the so- 
cialist party in this country numbers but about a half 
million, it has attracted to its ranks some capable men 
from many walks of life. No one can claim to be well 
informed on the subject until he has a clear perception 
of the socialist's viewpoint. One may reserve the right 
■ of agreeing with him or not, as he in his individual judg- 
ment sees fit, but one cannot afford to be ignorant of the 

395 



396 ECONOMICS 

program that he offers. To many the word "sociahsm" 
stands in the same category as "anarchy" and that, in 
the same category as "bomh-throwing." Such confu- 
sion of thought is the mark of an untrained mind. 

322. Eocploitation. — The objections which the so- 
ciahst m&kes to the present order of things seem to 
group themselves under five headings. First and fore- 
most, there is his behef in the universahty of exploita- 
tion. Exploitation consists of getting less in return 
for your services than you are worth. According to the 
socialist's use of the term, a day laborer creating in a 
year $900 worth of value and receiving only $400 in 
wages is being exploited by the capitalist to the amount 
of $500. In the eyes of the socialist, exploitation is 
an inevitable result of a system permitting the private 
ownershij) of the tools of production, and the purchase 
of labor in the same manner as any commodity. The 
ow^ner of the machine becomes the master, and the 
worker must accept his pay or starve. Since it is to 
the interest of the tool owner to get workers at the lowest 
figure possible, exploitation results. < 

The second criticism that the socialist urges against 
the present sj^stem is that it permits the growth of 
monopolies and offers no effective way to check them. 
Many of the fabulous fortunes of to-day have been made 
through the monopoly control of articles of general con- 
sumption — coal, meat, ice and iron; or through the 
ownership of monopoly business — street-car lines, tele- 
phones, railroads, gas and water supply. The socialist 
maintains that there is no escape to-day from the mo- 
nopolist's grip except by state ownership and operation 
of industry. He believes that it is hopeless, and further- 
more, undesirable, to endeavor to restore competition 
us a regulator of prices. As comx)etition largely gave 



SOCIALISM S97 

way to combination, so he believes state monopolies must 
succeed private monopolies. 

323. No remedy furnished by individualism. — The 
third criticism offered by the socialist is that society 
lacks a plan for the constructive development of all of 
its parts. He sees chaos in the present arrangement. 
The world is a bundle of contradictions to him. In 
an age of plenty, he still sees the universal specters of 
poverty, ignorance and crime. Although man has con- 
quered his environment, through harnessing the forces 
of nature and discovering her deepest secrets in the 
plant, animal, and mineral worlds, there still await solu- 
tion the problem of the underfed child, the homeless 
man, imperfect sanitation, low pay, and lack of em- 
ployment. Progress is a reality to him, but so is 
poverty. Wherever he looks he sees good and bad. 
Whichever it happens to be, seems to him to be but the 
result of blind chance. Too often the welfare and hap- 
piness of many are dependent solely on the accident 
of birth. The race of life is unequal. Some start with 
such handicaps as a body under-nourished from infancy, 
and a mind undeveloped, having nothing beyond the 
merest rudiments of an education. These are predes- 
tined to a life in a factory from the age of thirteen or 
fourteen, while others have the possibility of a college 
diploma, and social and business position awaiting them. 

324. Wastefulness of individualism. — The fourth 
criticism that the socialist urges against modern society 
is its wastefulness. Competition is uneconomic; coop- 
eration, economic. Under the competitive system much 
is done in duplicate and triplicate that could just as 
well be done once under a systenl of cooperation. 
This is particularly true in the distribution of goods 
for consumption. A half dozen competing hucksters, 



398 ECONOIMICS 

milkmen, and icemen, pass over the same route daily 
when half the number might have distributed the same 
amount of goods had there been no competition. In 
the question of milk, meat and like supplies, we can 
no longer trust to the private business conscience to 
give us goods free from disease and of unadulterated 
quality. The government now takes the indirect method 
of employing a large corps of inspectors merely to go 
over the work of private competitors, when it might do 
the work itself. 

325. Competition essentially evil. — A fifth criticism 
of the socialist is against the essentially evil nature of 
competition. In industrial competition he sees a force 
that calls out all the bad in human nature, while at the 
same time suppressing much that is good. To beat 
their competitors and make a profit men adulterate 
food, employ child labor, \ iolate factory inspection laws, 
and pay low wages. Competition puts the law-abiding 
and humane employer at a disadvantage and forces the 
indifferent employer over into the camp of those who seek 
success at any price. The socialist points out the fact 
that many a child-labor battle has been lost in a northern 
state because the cry was raised by even the most public- 
spirited employers that their business would be ruined 
if they had to compete with the low restriction ])ut upon 
child labor in certain of the cotton manufacturing states 
of the South. 

326. Tlie socialistic program. — And so the socialist, 
weighing the present organization of society in the bal- 
ance and finding it wanting, comes forward witli a plan 
Iniilt on an entirely different basis. He proposes to 
substitute for the i)rivate ownership of all land and capi- 
tal goods, i. e., factories, railroads, stores, and the like, 
government ownership and operation. Because under 



SOCIALISM 399 

such a system there would then be no capitahst to de- 
mand interest, all the returns of labor would go to labor, 
and exploitation would cease. As the government 
would own all the land and natural resources, there 
would be no monopolist's profits to be paid out of the 
pockets of consumers. Because competition would be 
destroyed, there would be no further incentive to 
adulterate goods, to employ child labor, or for the viola- 
tion of health and fire ordinances. In place of a society 
of competing units, each struggling to get the most 
for himself, the state under socialism, would substitute 
an orderly plan. Every child would be guaranteed 
education and support at state expense, and every man 
in old age after his life work is over, would be an honored 
pensioner of the government. Instead of working ten 
and eleven hours a day, the day would be cut in half, 
through the economics of cooperative action and the 
absence of social parasites. 

Under socialism every on6 would be a government 
employe. Instead of working for this corporation, or 
that entrepreneur, a man would work for the govern- 
ment, much as policemen, letter carriers, and firemen 
now do. The workman would draw his pay from the 
state as he draws it from this or that corporation and 
spend it as he sees fit, except that he could neither 
speculate in land nor stocks, as they would not be for 
sale. 

The socialist believes that in many ways society has 
outgrown the institution of private property, just as 
much as it has outgrown the institution of property in 
individuals known as slavery. He admits that both may 
have been valuable at a certain stage in the development 
of civilization, but that that time is now passed. In 
attacking the institution of private property it should be 



400 ECONOMICS 

bonie ill mind that the sociahst opposes private owner- 
ship of land, natural resources, antl tools of production 
only. Over the ownership of consuiiiption goods, as 
houses, clothes, food and the like, socialism, unlike com- 
munism, would exercise no control. 

327. Socialism and tJie single tax. — The socialist, in 
common with the single taxer, believes that the land 
is a gift to all from the Creator as much as air or water. 
He would, therefore, restore it to its original state. 
He feels, however, that the single taxer stops short in 
his reform in confining common ownership to only two 
means of life, farming and mining. He believes that 
the tools of production are equally, if not more so, means 
of life than land. Therefore, he contends they should 
be held in common as much as land and the natural 
resources. He maintains that social expediency, if not 
social justice requires as much. Arguing solely from 
the standpoint of expediency, he contends that if the best 
interests of society are served by a system of common 
ownership of its capital goods, then there is no reason 
why such a system should not be put into operation. 
Public opinion needs only a little further development. 
As it is now, there is hardly such a tiling as absolute 
ownersliip. One may own but he may not or shall not 
abuse his horse. Kven now society has an interest in 
private property, and the will of the individual must 
bow to it. 

328. How is socialism to he instituted?— ^We are here 
naturally led to ask, How can this change be wrought 
and all industry nationalized? This would require the 
accjuisition by the government of not only all land and 
resources, but also of all railroads and industrial plants. 
Could this be accomplislied with public opinion in its 
present condition? Such socialists as Mr. H. G. Wells 



SOCIALISM m 

would answer "No." He writes: "Socialist institu- 
tions, as I understand them, are only possible in a 
civilized state, in a state in which the whole population 
can read, discuss, participate, and in a considerable 
measure, understand. Education must precede the 
socialist state." And again: "I have tried to let it 
become apparent that while I do firmly believe, not only 
in the splendor and nobility of the socialist dream, but 
in its ultimate practicability, I do also recognize quite 
clearly that with people just as they are now, with their 
prejudice, their ignorance, their misapprehension, their 
unchecked vanities and greeds and jealousies, their un- 
tutored and misguided instincts, their irrational tradi- 
tions, no socialist state can exist, no better state can exist 
than the one we have now with all its squalor and 
cruelty. Every change in human institutions must 
happen concurrently with a change in ideas. Upon this 
plastic, uncertain, teachable thing, human nature, within 
us and without, we have, if we really contemplate 
socialism as our achievement, to impose guiding ideas 
and guiding habits, we have to coordinate all the good 
will that is active or latent in our world in one con- 
structive plan." 

Until this intellectual revolution is accomplished, what 
is the course open to the socialist by which he may 
ultimately reach his goal of the complete socializing of 
industry? The answer is found in the following quota- 
tions from a Fabian socialist : 

The peaceful and systematic taking over from private en- 
terprise, by purchase or otherwise, either by national or by the 
municipal authorities, as may be most convenient, of the great 
common servces of land control, mining, transit, food supply, 
the drink trade, lighting, force supply, and the like. The 

systematic raising of the minimum standard of life by factory 
1—26 




402 ECONOMICS 

and labor legislation, and particularly by the establishment of 
a minimum wage. These, along with the measures providing a 
longer school age, public baths, parks, and playgrounds, are 
some of the immediate lines of action open to the socialist. 

]Mr. Morris Hillquit, one of the acutest thinkers 
among American socialists, thus describes the transi- 
tional stage: 

Modern socialists recognize that social institutions are not the 
results of arbitrary choice, but of historical growth. When the 
ever working forces of industrial evolution have created new 
economic interests and social relations, the political forms of 
society must be modified to meet these changes, and when these 
new interests and relations become incompatible with the very 
basis of the existing social system, that system is bound to give 
way to a more adequate order. The socialists contend that the 
present system of individual ownership in the larger and social 
means of production, and the system of industrial competition 
based on such individual ownership, have become or are fast 
becoming incompatible with the interests of an ever growing 
majority of the population and with the progress of industry 
itself. They perceive a tendency in the modern industrial de- 
velopment towards the collective ownership of these means of 
production and the socialization of industries ; they see the public 
necessity of such transformation, and advocate and demand its 
acconiplislnnent. 

That is the whole of the socialist program, and it is cer- 
tainly wide enough. The transformation of the means of pro- 
duction from private to public ownership is by no means a 
simple task. It is not reasonable to suppose that the possess- 
ing classes, the owners of the land, the mines, railroads and 
factories, the financiers and capitalists of all descriptions, will 
some''fine day voluntarily surrender all their privileges and pos- 
sessions to the people, nor is it likely that the transformation 
will be accomplished by one single and simple decree of the vic- 
torious proletariat all over the civilized world. More likely the 



SOCIALISM 403 

process of transformation will be complicated and diversified, 
and will be marked by a series of economic and social reforms 
and legislative measures tending to divest the ruling classes of 
their monopolies, privileges and advantages, step by step, until 
they are practically shorn of the power to exploit their fel- 
low-men; i. e., until all the important means of production 
have passed into collective ownership and all the principal in- 
dustries are reorganized on the basis of socialist cooperation. 
The proposed measures that are expected to effect this eventual 
transformation constitute the "immediate" or "transitional" de- 
mands of socialism, and are part of the general socialist pro- 
gram, each socialist party emphasizing those points which are 
of more immediate importance in view of the social and political 
conditions of its own country at any given time. The measures 
thus most generally advocated by the socialists are: universal 
suffrage and equal political rights for men and women ; the 
initiative, referendum, proportional representation in legisla- 
tive bodies, the right to recall representatives by their constit- 
uents ; greater autonomy for the municipalities and limitation 
of the powers and functions of the central government ; the 
abolition of standing armies ; progressive reduction of the hours 
of labor and increase of wages ; state employment of the un- 
employed ; state insurance of workingmen in case of accidents 
and sickness ; old age pensions for workingmen ; state provisions 
for all orphans and invalids ; abolition of all indirect taxes ; a 
progressive tax on property, income and inheritance ; municipal 
ownership of all municipal utilities ; state or national ownership 
of all mines, means of transportation and communication, and 
of all industries controlled by monopolies, trusts and com- 
bines, and the gradual assumption by the municipality or state 
of all other industries as soon as they reach a state where they 
become susceptible of socialization. — Morris Hillquit, "Socialism 
in Theory and Practice," Chapter V, pp. 100-102. 

329. Reconciliation between socialism and individual- 
ism. — What the ultimate outcome of socialism will be 
it would indeed be difficult to state. Judging from the 



404 ECONOMICS ^ 

recent trend of tliouglit, it might be safe to predict 
that pubhc opinion will nltiniately come to be much 
more unified on many of the economic questions involved 
in sociahsm. There ah-eady seems to be a concihation 
going on between those who have hitherto been in op- 
posing schools of thought. The socialist of to-day seems 
to be more individualistic than his predecessor, while 
the old-time believer in laissez faire has practically disap- 
peared, and his successor, the man who still styles himself 
an individualist, has become more and more a socialist. 
The force of this statement can be felt by comparing on 
one hand the works of such socialists as JNIarx and Engels 
with those of H. G. Wells of England, and John Spargo 
of America, and on the other hand, the works of such 
an individual as Herbert Spencer with those of 
Professor Clark or men of the type of Ex-President 
Roosevelt. This change in a measure is the result of 
the growth of social consciousness which to-day seems 
to permeate the atmosphere of modern life. Certainly 
the political and social sciences are receiving increasing 
attention from both practical and academic stand- 
points. The failure of many communistic schemes 
seems to have impressed on the minds of reformers that 
in the past they often misread human psychology by 
allowing no room for the expression of individuality. 

From a theory of laissez faire we have so enlarged the 
functions of government that to-day they not only in- 
clude factory and food inspection, child labor and com- 
pulsory education laws, but in some places public 
ownership and operation of the public utilities of light, 
water, and street railways. INIany thoughtful students 
of modern problems — men who do not lielong to the 
ranks of the socialists — feel that the time is not far 



SOCIALISM 405 

distant when we shall be compelled to make a change 
in our present form of inheritance law, whereby vast 
fortunes are passed on from one generation to another. 
Some also feel that as a result of the present interest 
in child labor, women in industry, and the sweating evil, 
we shall ultimately fix not only the number of hours for 
work but also the rate of pay for women and children.. 

330. Socialists making concessions to individualism. — 
These changes would seem to indicate a conciliation 
that is rapidly being effected. This conciliation is not 
one-sided. The following from the pen of John Spar go 
indicates how socialism has abandoned some of its older 
traditions of substituting at every point state action 
for that of the individual. 

The new society must include at least the following: (1) 
ownership of all natural resources, such as land, mines, forest, 
oil wells, and so on; (2) operation of all the means of transpor- 
tation and communication, other than those of purely personal 
services; (3) operation of all industrial production involving 
large capital and associated labor, except where carried on by 
voluntary, democratic cooperation; (4) organization of all 
labor essential to the public service, such as the building of 
schools, hospitals, docks, roads, bridges, sewers, and the like; 
the construction of all the machinery and plants requisite to the 
social production and distribution, and of all things necessary 
for the maintenance of those engaged in such public services as 
the national defense and all who are wards of the state ; ( 5 ) a 
monopoly of the monetary and credit functions, including coin- 
age, mortgaging, and the extension of credit to private enter- 
prise. With these economic activities undertaken by the state, 
a pure democracy differing vitally from all the class-dominated 
states of history, private enterprise would by no means be ex- 
cluded, but limited to an extent making the exploitation of public 
interests and needs for private gain impossible. Socialism thus 



406 ECONOMICS 

becomes the defender of individual liberty, not its enemy. 
The future is not a life completely enmeshed in a net- 
work of government, but a life with a minimum of restraint. 

It is interesting to note in the above that the author 
only includes under government ownership and opera- 
tion all industrial production, production involving large 
capital and associated labor, except where carried on by 
voluntary, democratic cooperation. The possibility 
of the social "individualist," and the individualistic 
socialist some day standing on one and the same plat- 
form does not seem far removed when one notes the 
changes of thought that have occurred in the past 
century. 

331. H. G. Wells on socialism as social democracy. — 
The following, from "New Worlds for Old," by H. 
G. Wells, shows to how large a degree the modern 
socialist is trying to remove the name Utopian from his 
cause — ra charge which has kept from his ranks a large 
number of men of practical affairs. 

I myself am the profoundest believer in democracy, in a 
democracy awake intellectually, conscious and self-disciplined; 
hut so long as this mystic faith in the crowd, this vague, emo- 
tional, uncritical way of evading the immense difficulties of 
organizing just government and a collective will prevails, so 
long must the socialist project remain not simply an impracti- 
cable, but in an illiterate, badly organized community, even a 
dangerous suggestion. I, as a socialist, am not blind to these 
possibilities, and it is foolish because a man is in many ways on 
one's side that one should not call attention to his careless 
handling of a loaded gun. Social democracy may conceivably 
become a force that in the sheer power of untutored faith may 
destroy govermncnt and not replace it. 

Perhaps the future of the whole socialist movement 



SOCIALISM 407 

cannot be better stated then by again quoting from H. 
G. Wells: 

The modern socialist considers that this generalization (i. e., 
of an inevitable class war, of a revolution followed by a mil- 
lennium) is a little too confident and comprehensive; he perceives 
that a change in custom, law, or public opinion may delay, ar- 
rest or invert the economic process; that socialism may arrive 
after all not by a social convulsion but by the gradual and de- 
tailed concession of its j)ropositions. The Marxist presents 
dramatically what after all may come, methodically and unro- 
mantically, a revolution as orderly and quiet as the precession 
of the equinoxes. There may be a concentration of capital and 
a relative impoverishment of the general working mass of peo- 
ple, for example, and yet a general advance in the world's pros- 
perity and a growing sense of social duty in the owners of 
capital and land may do much to mask this antagonism of class 
interests and ameliorate its miseries. Moreover, this antagonism 
itself may, in the end, find adequate discussion and the class war 
come disguised beyond recognition with hates mitigated by 
charity, swords beaten into pens, a mere constructive conference 
between two classes of fairly well-intentioned, albeit perhaps still 
biased, men and women. 

The above quotations indicate the weakness of social- 
ism as an immediate and practical line of action. The 
acquisition of all tools of production by the government 
would involve the confiscation of a large amount of 
property or the taxation of the people in order to buy 
out the existing owners. A*s desirable as the government 
ownership of these tools of production might be from 
the theory viewpoint, it could hardly be accomplished 
with human nature and public opinion in anything 
like its present stage of development. It may be, 
furthermore, legitimately questioned whether the 
agencies of the national government, the state or the 



408 ECONOMICS 

inunicipalit}^ are to be trusted to conduct business with 
the same efficiency and economy as it is conducted under 
the present system of private ownership. Whatever 
may be the abuses of the present system, it must be ad- 
mitted after all that the vast majority of men in the 
United States are living on a higher standard of living 
than at any other stage in the world's history and while 
this fact does not excuse the present evils which exist, 
nor is a cause for accepting present conditions as all that 
is to be desired, it does furnish a good reason for con- 
sidering well before overthrowing our present system 
of production in its entirety. 

Socialism is not new, but is a very old theory that has reap- 
peared constantly in one form or another, at least since the tinw 
of Plato. It has been advanced often when a sharp separation 
hetween the classes of rich and poor has brought the problem 
of poverty to the front. Ideals of political or social equality 
have been another cause of socialistic theories. Plato's "Repub- 
lic," with its proposals for the cxtrcmest subordination of indi- 
vidual life to the direction of the State, has for its background 
a sharp separation of classes, and a bitter conflict between rich 
and poor, that occurred not only in Athens but in most of the 
Grecian cities. In the sixteenth and seventeenth centuries, the 
social distress caused by widespread economic and political 
changes led to such works as Sir Thomas Morc's "Utopia" and 
Canipanclla's "City of the Sun." Again, in the eighteenth cen- 
tury, the misery existing in France before the Revolution fur- 
nished a fruitful field for socialistic speculations. Finally, since 
the Industrial Revolution, the increased importance of capital 
has caused a sharper separation of capitalists and laborers, and 
has furnislicd the ground for the growth of modern socialism. 
This movement has been strengthened by the growth of demo- 
cratic political ideals.^ 

1 The student would find it interestinp to read Plato's "Republic"; see 
Jowett's " Dialogues of Plato," III. Tiiere is hardly a better criticism of 



SOCIALISM 409 

Socialists criticise severely our present methods of produc- 
ing wealth, and hold that production could be much more ef- 
ficiently managed under socialism. They urge that competitive 
methods are "planless." Producers now work at cross purposes ; 
mistakes are common ; and our industry is far less productive 
than it would be if managed on the largest possible scale, in ac- 
cordance with comprehensive general plails. Secondly, our 
present competitive methods cause a great deal of waste. Not 
only have we much unnecessary reduplication of plants, but also 
needless expenses for advertising, traveling salesmen, and similar 
purposes. Thirdly, producers have a strong inducement at 
present to increase the valtie of their commodities by restricting 
the output, as is done by the anthracite coal monopoly. Soci- 
ety is poorer on account of the artificial scarcity created in this 
way. Again, socialists show that there is great waste in our 
methods of exchanging products. Many more people are en- 
gaged in wholesale and retail trade, especially in the latter, than 
are really needed. 

We must admit that there is a great deal of truth in all of 
these criticisms. But such an admission does not necessarily 
lead to the acceptance of socialism. For the weakness of social- 
ism is even greater than that of the present system. 

1. First of all, will socialism lead men to exert themselves 
as actively as they do at present under the desire for pecuniary 
gain.'' Socialists urge that the desire for social esteem is a 
powerful motive at present, and would prove still more so under 
their system. But while many people are influenced by the de- 
sire for social esteem, others, apparently, are not deeply affected 
by this motive. Moreover, social esteem of one kind or another 
can be gained at present by many actions that do not conduce 

socialism than that passed by Aristotle upon Plato's schemes; see Aris- 
totle's " Politics," Bk. II., Chaps. 3 and 5. Plato's " Republic " has been 
called " the fruitful parent of modern Utopias" ; and, after studying it, 
the student might read the socialistic romances contained in Morley's " Ideal 
Commonwealths," especially More's " Utopia " and Campaxei.la's " City 
of the Sun." Then Mr. Bellamy's " Looking Backward," the best known 
of the ronuinces representing modern socialism, might be read in connection 
with these earlier writers, 



410 ECONOMICS 

to the real welfare of society ; and it is not clear that, under 
sociahsni, public opinion would so change that men could not 
gain notoriety in ways that would be thoroughly harmful. Also 
socialists claim that altruistic motives may be expected to have 
greater force under a socialistic regime. But we have no ex- 
perience that justifies us in assuming that the majority of men 
will, in any immediate future, exert themselves as actively under 
the influence of such motives as they do at present under the 
stinmlus of self-interest. Of course, the socialistic state might 
compel men to work. But would such labor be more effective 
than that of slaves or convicts? 

2. The difficulties of organizing and managing all industries 
on a national scale are enormous. These difficulties would be 
especially great in industries like agriculture that do not lend 
themselves readily to large-scale production. Moreover, gov- 
ernmental management presents serious problems, chiefly the 
(hfficult3' of securing as honest and efficient administration as can 
be secured by private enterprise, at its best. Doubtless our 
methods of public administration can be improved, and would 
be further improved before the government should assume the 
control of industry. But we have no reason to believe that the 
government could avoid errors, or tliat, on the whole, it could 
carry on manufactures and agriculture more successfully than 
they are conducted at present. 

3. Another difficulty that socialism would encounter would 
be the determination of methods for distributing the labor force 
among the various employments. Some are much more pleas- 
ant or are esteemed more highly than others. Will it be possible 
for the government to apportion tlie more important or more 
desirable positions in such a way as to cause less dissatisfaction 
than at present.'' A very important question arises here. By 
eliminating incompetent persons from the field of competition 
we manage fairly well at present to secure able management of 
industries ; and we offer the prospect of exceptional profits as 
a reward for special efficiency. Will the mass of people living 
under a socialistic government consent, by their votes or other- 
wise, to adequate methods of securing able business manage- 



SOCIALISM 4ir 

ment? Taking men as we find them at present, this may well 
be doubted. — C. J. Bullock, "Introduction to the Study of 
Economics," pp. 504-508. 

THE socialist's ECONOMIQ ERROB.. 

It is a fundamental error in analysis to ascribe the value of 
the products of industry to the labor involved in their produc- 
tion. Value, as already explained, is the joint result of utility 
and limitation of the supply. Under conditions of free com- 
petition value arises because of the cost involved in producing 
goods. This varies under different natural conditions and con- 
sequently rent appears. Under the least favorable natural con- 
ditions resorted to cost includes not only labor, but ■ also the 
sacrifice involved in supplying the capital indispensable to 
efficient production. The value of the product must be great 
enough to remunerate workmen and capitalists, or the induce- 
ment which causes those at the margin of doubt between saving 
and spending to save will be removed and the fund of capital 
will be reduced. The payment of interest is as just and, eco- 
nomically, as necessary as the payment of wages. It is the 
premium industrial society offers to those who will furnish it 
with the capital it needs and it is never higher than is necessary 
to secure this capital. It is true that much of the needed capital 
would be furnished if there were no premium, but it is equally 
true that many workmen, and especially those whose work is of 
most value to society, would work for nothing rather than aban- 
don their chosen professions. In each case the reward is deter- 
mined by the character and motives of the marginal men in the 
group affected. In each case, moreover, the necessity of reward- 
ing these marginal men gives a value to the product sufficient 
to reward at the same rate all men in the group. The interest 
capitalists receive is in no sense subtracted from the reward that 
goes to labor. It comes from the extra product due to the 
assistance which capital goods render to production, just as the 
wages of labor come virtually from the products of labor. In 
neither case is there any exploitation of one factor by the other. 



4ia ECONOMICS 

If this analysis is accurate the whole contention of Marx and his 
followers falls to the ground, and the present industrial system 
is cleared at least of the charge of being based on the legalized 
robber3' of the laboring by the propertied class. 

Although based on an incorrect analysis of economic relations 
in its revolutionary form and looking forward to a future so 
remote as to have little direct bearing on present-day problems 
in its evolutionary form, socialism is much more than a mere 
"philosophy of the unsuccessful" or "vision of deluded dream- 
ers." As an ideal it appeals strongly to many men and women 
who are neither unsuccessful nor dreamers and it supplies them 
with an excellent standard by which to criticise the undoubted 
evils in the present economic situation. Such criticism is both 
lulpful and harmful. So far as it serves to concentrate at- 
tention upon definite evils and to foster the belief that they arc 
remediable, it is a valuable aid to constructive social reform. 
So far, however, as it tends to intensify class antagonisms and 
to teach wage-earners that they are the victims of legalized 
exploitation and that they must organize to despoil by force 
the owners of property who oppress them, it is a bar to true 
progress. — H. R. Seager, "Economics: Briefer Course," pp. ^ 
448-9. 4 



CHAPTER VI 

LABOR PROBLEM 

332. Nature of the problem. — The labor problem is 
the result of two conflicting viewpoints as to the true 
status of labor in our industrial system. The capitalist 
says: "Labor is a commodity which I have a right to 
purchase in the open market at as low a figure as I can." 

The laborer says: "I am a copartner with capital in 
industry and as a copartner am entitled to be heard on 
the question of how industry shall be conducted — (i. e., 
on the hours of work, the question of physical safety and 
insurance) and am entitled to have a voice as to my 
share in the proceeds of industry." 

All the so-called problems of labor, from that of the 
^closed shop, the boycott and restriction of output, to 
that of the open -shop, the black list and pace-setting, 
result from a lack of harmony between these two view- 
points. The interests of labor and capital may be 
harmonious in the long run, but as a practical problem, 
the present interests of employes and the employers 
often seem to conflict. It is to the immediate interest of 
the employer to get all out of his men within reasonable 
limits that he can for as low wages as possible, while the 
employe is interested in getting as high a return for his 
services as he can command. 

There is thus in the eyes of both groups a see-saw 
relation between profits and wages. As one goes up, 
the other correspondingly falls. On this antagonism 
of immediate interests rests the whole labor problem. 

413 



414 ECONOMICS 

One must face this issue squarely before he can com- 
prehend the labor movement. With the growth of 
capital and its rapid concentration, labor soon saw that 
it must accept the commodity status assigned to it by 
capital or combine as capital had done, and so through 
the increased power thus gained, assert its claims. The 
result was the rise of the institution known as the labor 
union. 

333. Aims of the union. — Unless one can fully ap- 
preciate the fact that the union is one of the great social 
institutions performing services not now adequately per- 
formed by any other social agency, he cannot under- 
stand the labor movement — much less criticise it. The 
more one studies the growth of the labor movement in 
America, the rhore one loses patience with the attitude 
of mind which summarizes its position on the question 
by merely stating that it is "for or against the unions." . 
That unions are perfect, few will contend; that they are 
wholly bad, few will admit. That they form one of our 
great social institutions, with a complexity as great as 
modern life itself; that they constitute an institution 
solving its problems slowh^ and sometimes with mistakes, 
— all must realize who have examined into the evidence. 

The union is reaching down and tal^ng hold of the 
one sole possession of the great body of men — their 
labor — and is using its ^ growing .power to guard and 
protect that labor and its possessor so that its return will 
not only cover the workingman's cost of producing his 
labor, but will bring to him a larger share of the wealth 
which he assists in producing. 

The union stands as a protest against the condition 
which obtains, in the great industrial city of Pittsburgh, 
where the wages of a great majority of the laborers em- ^ 
ployed by the mills is inadequate for tlie maintenance 

I 



THE LABOR PROBLEM 415 

of a normal American standard of living; wages ad- 
justed to the single man in the lodging house, not to 
the responsible head of a family. The trade union 
recognizes, first of all, that labor has a cost of production 
just as certain as coal or shoes or any other material 
commodity. This cost may not be and is not represented 
in royalties, interest, wages, freight rates, etc., as is the 
case with the cost of producing coal, but it is made up 
of items which are just as much subject to definite 
analysis — of food, clothing and shelter. To meet this 
cost of producing labor, the only thing the workingman 
can do is to sell his commodity — his labor — that is, he 
must apply his physical energy to the transformation of 
material goods in return for money wages by means of 
which he secures food, clothing and shelter. 

But to reduce wages to its mere cost of production, 
i. e., to a basis which will just supply the elemental needs 
of all men of food, clothing and shelter, loses sight of 
the fact that the laborer is also a man with duties and 
obligations and rights as a citizen, as a father and 
husband. The welfare of a nation means nothing, if 
not the welfare of the people and the vast majority of 
the nation are dependent for their chief source of income 
on the wage contract. As Dr. Frank J. Warne points 
out in impartial and scholarly studies of the unions made 
at first hand: 

The trade union not only emphasizes higher money wages for 
the working classes, but it seeks to secure for them better homes, 
(not merely better houses), lower prices for the commodities they 
consume, (as through cooperative establishments and by opposi- 
tion to "company" stores), more opportunities for their children 
in the schoolhouse, better clothes and food for their wives and 
children, greater safeguards against injury and death in haz- 
ardous employments, insurance and relief benefits, less hours of 



416 ECONOMICS 

work, Jiiul Innumerable other ''rights" which tliej do not now 
enjoy and which wjll ever be denied to tiieni if they themselves 
do not control, through the trade union, the forces which are 
ever at work to bring about low wages and adverse conditions of 
employment. All these and other objects of the trade union 
have to do with the workingman more as a man than as a 
j)roducer of labor — as a social animal rather than a labor-pro- 
ducing machine. 

A fact which should never be overlooked in discussing 
the trade union is that it is the only method left to labor 
whereby it can combat the forces which are ever at work 
to bring about low wages and adverse conditions of em- 
ployment. One should dissassociate from the word 
"forces" as used in the above sense any idea of personal- 
ity. It is not so much the idea of a personal capitalist 
"grinding down the faces of the poor" which is at the 
root of the labor question as it is the fact that some eco- 
nomic forces now at work in this country of their own 
operation tend to bring about low wages. The law is 
understood by all business men. It is merely a phase of 
the general truth that the article offered for sale at the 
lowest price drives its competitors from the market. 
T ^nder a free competitive system in the labor market, as 
would be the case were there no unions, the man with the 
lowest standard of living must displace the man with the 
higher standard. This is not necessarily the fault of 
the employer. Under a competitive system he must get 
his labor as cheaply as his competitors or he himself is 
forced to the wall. So that it is largely the economic 
forces which tend to force wages down which the union 
opposes. That this is no bit of theory is apparent to 
all who know auytliing of the Slav invasion of the 
antlu-acite coal mines of renusylvania. Tlie whole dis- 
turbance in that particular industry culminating in the 



THE LABOR PROBLEM 417 

famous coal strike of 1902 was the result of a conflict 
of standards of living — the American and the Slavic — 
which resulted in each case in a victoiy for the Slavic 
until the Union was able after a successful strike to 
check the tide. 

334. The wage-worker as a bargainer. — The union 
principle is that found in the old adage "In union there 
is strength." Under the conditions of modern industry 
where all the tools of production are in the hands of one 
group the single-handed individual laborer is not in a 
position to make a fair bargain for his wages. A fair 
bargain implies more or less of equality between those 
making it. A man who is in a position where he must 
take either what is offered him or do without, is not in 
any real sense making a bargain or contract. The union 
steps in at this point to place labor in a position where it 
can bargain for itself, for just in proportion as the 
laborers stand shoulder to shoulder can they make their 
demands known and felt. 

It is hardly conceivable that any group of men 
struggling to maintain their standard of living, or any 
group of men unused to power which they suddenly find 
within their grasp, should at all times act wisely. Nor 
should we expect among organizations numbering over 
three million men an equal degree of intelligence, high 
purpose and lack of ableness. Like all other institutions 
there may be good and bad organizations among them. 
It is not the purpose of this chapter to discuss particular 
unions, nor particular epochs in unionism, but rather to 
speak of the broad problems of labor. 

335. The closed shop. — Among the so-called abuses of 
the union is the policy of the closed shop. It is impos- 
sible to pass any general verdict on the justice of this 
policy. Most Americans are inclined to condemn it ofF- 

1—27 



418 ECONOMICS 



^ 



hand as an attempt to deprive the non-union man of his 
"sacred right to work." They forget that the miion 
man enforces the closed shop pohcy by an exercise of 
his "sacred right of quitting work." Two equally 
"sacred and unalienable rights" clash in this contest. 
The philosophy of social expediency and not the 
philosophy of rights can decide such a question. All 
the surrounding circumstances must be gone into before 
one can justify or condemn the policy of a closed shop. 
There is nothing inherently wrong in the policy of a 
closed shop provided it is maintained for lawful ends, 
chief of which is the guarantee of an Amercan standard 
of living to American workmen. 

336. The boycott. — The boycott is another of the so- 
called abuses of the labor union. It is an organized 
refusal on the part of a group of persons to buy goods 
from another person or group of persons. The boycott 
is thus the weapon of the worker and the general 2:)ublic. 
Occasionally it is used by business houses against each 
other, but in general it is confined to the ^^'orke^s and the 
general public. 

A boycott ma}^ be of several classes, some of which 
the courts view as legal and others not. There is first 
the simple boycott in which a group of workers who have 
been working for a certain man refuse to buy his prod- 
ucts. Boycotts usually originate in this way, but they 
soon extend to the second form or compound boycott. 
In a compound boycott the workmen directly interested 
ill injuring the boycotted person or persons, enlist the 
cooperation of third parties. Instead of the employes 
of John Smith getting togetlicr and refusing to buy 
liis hats, they go out into the highways and byways and 
advise their friends, relatives and neighbors not to buy 
hats made bv Smith. The third form of boycott is 



THE LABOR PROBLEM 419 

negative in its effects. It takes the form of a fair list 
or white hst. The union periodical prints a list of firms 
which are described as "fair," that is, union hours and 
union wages obtain throughout their plants. The Con- 
sumers' League also publishes what they call a "White 
List," which is a list of firms which do not violate factory 
laws and which conform to certain regulations prescribed 
by the League. The fourth form of boycott is the "un- 
fair" list, or, as it has been called, the "we don't patron- 
ize" list. The labor periodical, instead of publishing the 
names of firms who provide fair conditions for their 
employes, publishes the names of firms who do not 
provide fair conditions. 

The second form of boycott is regarded as a con- 
spiracy. The fourth form of boycott has been prohibit- 
ed in some cases by the courts. Both forms have de- 
veloped remarkably and their use has become quite 
extensive. The power which labor unions derive from 
using them is in some cases very great. Since some 
recent court decisions, however, the effectiveness of the 
boycott from the standpoint of the worker is materially 
lessened. 

The boycott is one of the problems of labor which 
must be left for settlement to the American's sense of 
fair play as reflected in the courts. By many employers 
the boycott is arraigned as among the most "objection- 
able" features of organized labor. So strong is this 
feeling that there exists to-day an American Anti- 
Boycott Association, which is national in scope. 

337. Opposition to machinery. — It has often been 
urged against unions that they have opposed the in- 
troduction of new machinery and so blocked progress. 
That this has been true in the past to a certain extent, 
cannot be denied, That it is becoming less and less 



420 ECONOMICS 



^i 



ciistoniarv is equally true. There is a justifiable ground 
on which unions may oppose a too rapid introduction of 
machinery, which temporarily and in particular occupa- 
tions tends to reduce wages. That the opposition 
should be to the introduction of new machines at any 
time 'or under any conditions cannot be justified from 
any viewpoint. 

.*}.*}8. Efforts to restrict trade unions. — These have 
been largely through the courts and through employers' 
associations, (a) Through the courts: This has been 
bj' the instrumentality of the injunction, w^iich is an or- 
der of the court commanding a person or group of per- 
sons to refrain from doing the thing or things specified 
in the order. It is issued on the ground of preventing 
damages which woidd be irreparable if the case were 
permitted to go through the regular processes of law. 

The injunction is a most effective means by which to 
control the actions of strikers. In every strike some 
kind of coercion is resorted to. This coercion varies 
from the peaceful visit to a strike-breaker's house, and an 
argument which aims to con^ ince him that he should 
join the union or at least cease breaking the strike, to the 
riot or some other form of physical violence against the 
person of the strike breaker. In many strikes the vio- 
lence extends to the property of the employer as well 
as to the body of the strike breaker. 

The injunction is effective because it must be obeyed 
absolutely. There is no process of law involved in 
forcing this obedience. The court is the direct agent 
of the executive and legislative authorities in this re- 
spect, and its orders are backed by all the power of the 
state or nation. 

The ])unishmcnt for offenses against injunctions is 
limited onlv by the discretion of the court. There is 



THE LABOR PROBLEM 421 

no limit governing the severity of penalties, other than 
the desire of the judge to enforce obedience to his orders. 
The penalties may be reviewed by a higher court, but 
the latter hesitates to overrule the attempts of a col- 
league to punish "contempt of court." 

While the injunction is thus cited by the employer as 
the most valuable and most effective means of protect- 
ing his property against strikers, it is in the same pro- 
portion opposed by the labor union. The injunction 
has proved a most effective weapon in overthrowing 
union control. The power of the union rests on two 
things: First, the right of the members to bargain 
collectively with the employer; and, second, the power 
to enforce demands by a strike which has at least a rea- 
sonable chance of being successful. The use of the in- 
junction to restrain the strikers has taken from them the 
opportunity of resorting to many acts which were or- 
dinarily used as the weapons for winning strikes. By 
decreasing the possibility of successful strikes, the court 
has decreased the possibility of effective trade unions. 
The foundation of the trade union is at stake, and the 
whole energy of the union is bent against "government 
by injunction." In proportion as the employers have 
resorted to injunction and secured from the various 
courts an extension of its scope, the various unions have 
opposed its use constantly and bitterly, and have been 
for some time endeavoring to secure a federal law which 
would prevent the forms of injunctions which have been 
so disastrous to labor union interests. 

(b) Through employers' associations: The last dec- 
ade has seen the rise of associations among employers 
to curb the growing power of the unions. Formerly 
there were times when one employer would welcome and 
even encourage a strike against a rival concern for the 



4-22 ECONOMICS 

purpose of embarrassing him. They soon learned that 
such practice did not pay, as a successful strike in a rival 
plant but paved a way for successful strike in their own. 
As an outcome we have the rise of employers' associa- 
tions, which fight labor organizations with their own 
weapons, matching the lockout against the strike, the 
black list against the boycott, and the "labor bureau" 
against the "unfair list" of the trades union journals. 
Most of the employers' associations have associated 
themselves for common action in a large national federa- 
tion, the Citizen's Industrial Association of America, in 
which in December, 1903, there were affiliated sixty na- 
tional employers' associations, sixty-six state and dis- 
trict associations, and three hundred and thirty-five local 
or municipal associations of employers. 

One of the most prominent of these associations is that 
known as the National Association of jNIanufacturers, 
representing many of the prominent manufacturing in- 
terests of the country. In 1907 a fund of a million and 
a half dollars was agreed upon as a requisite amount 
for the expenditures necessary for the next three years in 
carrying on their campaign of education. They stand 
opposed to many practices of the union and desire to 
see an increase in technical education throughout the 
country. They hope to win the public to their view- 
l)oint by instituting a series of lectures and printing 
numerous tracts on the subject. Some of the men who 
are most j^rominent and active in tliis association have 
been fighting vigorously for many years against labor 
strikes and boycotts. 

Some otlicr of employers' associations assume a more 
militant attitude llian tlic National Association of Man- 
ufacturers and may l)c correctly described as "union 
smashers." Such associations have little regard for 



THE LABOR PROBLEM 423 

the establishment of sound principles of collective bar- 
gaining, and they are usually violentty opposed to any 
recognition of organized labor; their aim is to weaken 
and harass their enemy, the labor organization, when- 
ever possible. 

339. Methods of conciliation and arbitration. — From 
the standpoint of the employer, the employe and the 
general public strikes and lockouts are far from un- 
mixed blessings. The end that they intend to accom- 
plish may be good, but the means are wasteful and un- 
economic. Production ceases, profits and wages stop, 
property may be destroyed, and the public is deprived 
of some article of consumption or else compelled to pay a 
higher price for it. Such being the case, it is not sur- 
prising that steps should early be taken to avoid a 
method of settling industrial disputes analogous in some 
ways to settling breaches of contract by street fights. 
Many schemes have, in fact, been proposed, and they 
group themselves under four headings, the first of which 
is the trade agreement. The trade agreement is merely 
a collective bargain. Once a year or once every two 
years a committee appointed by the employers meet one 
appointed by the workers, and these two committees go 
over the question of wages, hours, and working condi- 
tions, discuss the outlook, and decide on the conditions 
which shall govern the trade during the period of a year 
or for as long as the agreement may be made. At the 
end of this time another session is held, the committees 
go over the ground again, and endeavor to reach a con- 
clusion for the succeeding period. This method of 
avoiding strikes has proved effectual in many cases which 
involve reliable unions, such as railroad brotherhoods, the 
boot and shoe workers, the miner's unions and many oth- 
ers. A large number of union differences are settled 



424? ECONOMICS 

(liiietly by means of collective bargains or trade settle- 
ments for sjjecific periods, wliicli are renewed from time 
to time as they fall due. By such a simple method as 
tliis, peace in the coal fields of Pennsylvania was again 
assured in 1909 for at least the next three years, by an 
agreement entered into by the coal operators and the 
representative of the miner's union. 

If it can be put into practice, the collective bargain is, 
after all, the ideal method of settling labor disputes. 
No outside labor force need be imposed, and the two 
parties by getting together can settle their difference in 
a way satisfactory to both. Now and then a disagree- 
ment and a strike may result from this method of bar- 
gaining, but as a rule it works in a most commendable 
way. 

The second form of strike preventive is the voluntary 
submission of the points at issue to an arbitration board 
of three members, one appointed by the workers, one 
appointed by the employers, and the third selected by 
these two. This method of settling differences is much 
less satisfactory than the trade agreement, and the con- 
clusion is reached by third parties who are not always 
directly interested in the problems, and both of the con- 
tending elements mav therefore be dissatisfied with the 
result. This form of voluntary arbitration is negligible 
in its importance so far as labor disputes are concerned. 

The third form of strike preventive is the voluntary 
state board of arbitration. This form, which has been 
fairly well worked out in some of the American states, 
provides that the governor of the state shall appoint a 
numl:»er of men in the various districts who are always 
prepared to act as a board of arbitration, provided one or, 
in some cases, botli of the parties in the controversy re- 
(juest the state board to act. Kxcept in a few cases this 



i 



THE LABOR PROBLEM 425 

form of arbitration is likewise unsatisfactory and is 
seldom resorted to. 

The fourth form of strike preventive is compulsory 
arbitration, a distinctively Australasian experiment. 
Under this method of settling difficulties strikes and 
lockouts are forbidden under penalty. When indus- 
trial questions arise, they must be submitted to the prop- 
erly constituted local authorities, who decide the points at 
issue in exactly the same way as a court of law decides 
legal points. The advocates of this system of compul- 
sory arbitration hold that it is just as ridiculous to allow 
a trade union and an employer to fight out their differ- 
ences as it would be to allow a man whose contract had 
been broken to go out and thrash the man who was 
guilty of breach of contract. In both cases the power 
of the state should be invoked to punish the offender and 
to do justice to the person injured. The Australasian 
system is merely a system of individual judiciary worked 
out on the same principles as the law courts and having 
jurisdiction over disputes between employer and em- 
ployes. 

Whatever shall prove to be the ultimate method of 
settling industrial disputes, certain it is that we are 
approaching the time when the decisions shall rest more 
and more on an appeal to reason and less and less on 
an appeal to force. The labor problem is too momen- 
tous an issue to be decided on other than the most en- 
lightened grounds. In its proper solution rests the 
progress and prosperity of the whole nation. The 
American labor force is the cornerstone of our greatness. 
It is our most valuable resource and any nation which 
exploits its resources with no thought of the morrow 
must ultimately pay the penalty — especially if that re- 
source be labor. 



QUIZ QUESTIONS 

(The numhers refer to the numbered sections in the 

text) 

PART I: PRODUCTION 

CHAPTER I 

1. Define economics. Define wealth. What is the 
distinction between free and economic goods? 

2. Describe the origin of private property. What 
does Blackstone mean by "community of ownership?" 

3. What are the provisions of the right of private 
property? What restrictions does society impose on 
this right? Illustrate why? 

4. How does the state limit the right of private prop- 
erty? 

5. What effect have public improvements upon the 
right of private property? Why does not this seem a 
restraint? Explain the doctrine of "eminent domain." 

6. How do the rights of private property affect in- 
dividuals? Why is it that men will not produce more 
than they need ? Show the effect of immigration, using 
a bank as an illustration. 



CHAPTER II 

7. What is the distinction between utility and useful- 
ness? Define and illustrate an act of production. 

427 



4^8 ECONOMICS 

8. Describe the four principal forms of production 
and give illustrations of each. 

9. Exj^lain time utility. 

10. Define and illustrate possession utility. 

11. What are the agents or factors in production? 
Which are primary and which are secondary? 



CHAPTER III 

12. What function does Nature perform in the pro- 
duction of wealth? Define what is meant by "free 
goods of Nature," and show how their supply affects 
human progress. 

13. Give changes in form and place required by pro- 
duction. Upon what does the industrial future of this 
country depend? 

14. What part does Nature play in production? 
What is the.ntiost important natural source of power in 
this age? 

15. What other proj^erties of goods affect produc- 
tion ? 



CHAPTER IV 

10. Define labor. Is it i)ossible to discriminate be- 
tween the respective contributions of brain and muscle? 

17. What is the effect of labor upon production? 
iVccording to INIill upon what does man's labor depend 
for its results? 

18. What (juulilies dttermiMc efficiency? Under 
wliat tln-ee lieads are tliey classed? 



QUIZ QUESTIONS 429 

19. Upon what does physical efficiency of labor de- 
pend ? To what movement has a realization of this 
given rise? Where did it originate? 

20. Give the important results of this movement 
upon the industrial world. What has been done to bet- 
ter hygienic conditions? 

21. What does Mr. Outerbridge say as to the im- 
proved systems of industrial management? Does he 
base his views entirely upon philanthroj^ic grounds? If 
not, why? 

22. In what respects does the state protect the wel- 
fare of employes. Is the legislation uniform through- 
out the United States? What are the four important 
restrictions on child labor? 

23. Do employers further their interests by possess- 
ing the good will of their employes? What should 
and should not be considered the duties of the em- 
ployer to his employes? 

CHAPTER y 

24. What are the effects of inheritance upon the 
mental efficiency of labor? of education? of a good 
home? 

25. What is the capital value of (1) unskilled labor; 
(2) shop trained or apprentice; (3) trained in trade 
schools; (4) educated in higher technical schools? 
What conclusion do you draw from these figures? 

26. Why can a technically trained man command a 
high salarj^? What does this fact illustrate? 

27. What is the effect of preliminary training in the 
field of business? What is reasoning? How does the 
power to reason influence success in business? 

28. What is the present relation in the United States 



430 ECONOMICS 



^1 



between the modern commercial and industrial under- 
takings and the universities? 

29. What evil effect have modern industrial methods 
had upon labor? What has been done to remedy it? 

30. Describe the first-class apprentice system. What 
are the other classes? What positions do men from 
each of the three classes fill? 

31. What is the form of preliminary training for 
shop superintendents? What is its chief advantage? 

32. Generally speaking, upon what does a laborer's 
honesty depend? Upon what does his ambition de- 
pend? 

CHAPTER VI 

33. Is the labor of women and children economical? 
Why is the inefficiency of woman and child labor no 
bar to their employment? What does the census of 
1900 show as to child labor? Why is the child labor 
problem in the South particularly difficult? 

34. What are the moral and physical effects of child 
labor? What essential feature in modern factory work 
is particularly harmful to the child? 

35. What are the indirect effects of child labor upon 
industry? 

30. Why is child labor more prevalent in new in- 
dustries? In what two ways may child labor be con- 
sidered cheap? 

37. Is the entrance of women into industry compara- 
tively recent? What are the causes of this entrance? 
What is meant by the standardization of industry? 

38. Why can women work for lower wages than 
men? What types of industry have women found it 
easiest to enter? 



QUIZ QUESTIONS 431 

39. What change in industrial conditions has led to 
the great influx of women into factories ? Illustrate. 

40. Give five arguments against woman's labor. 

41. Give eight arguments in favor of women in in- 
dustry. 



CHAPTER VII 

42. Compare primitive man with civilized man. 
What has spanned the gulf between the two? 

43. What does the United States Census Bureau 
state as the wealth of this country? Into what sub- 
divisions is the capital of the United States divided? 
Distinguish between consumption goods and capital 
goods. 

44. What is the service of capital in production? 
What methods of production illustrated in the quota- 
tion may be considered capitalistic? 

45. What is the relation between the efficiency of 
capitalistic production and its indirection? What is 
meant by the direct method of production and by the 
indirect ? Illustrate the difference. 

46. Show how a fishing vessel illustrates capitalistic 
production. 

47. What long series of productive acts might be 
caused by an increase of the flour trade between China 
and the United States? 

48. Define saving. What does the production of 
consumable goods necessitate? 

49. In what way does the amount of saving depend 
on the financial condition of the country? Illustrate. 

50. Why is saving necessary? 

51. What are the two important expense accounts on 




¥32 ECONOMICS 

the books of all railroads? AVhat form of saving do 
they illustrate? What is the underlying principle? 

52. What is meant by depreciation? Illustrate. 
Why is depreciation difficult to estimate? 

53. What is meant by the consumption of capital? 

54. Distinguish between productive and unproduc- 
tive consumption. In what way may the statement that 
the expense of war is unproductive consumption be 
(qualified. 

55. Show the difference between the economically 
useless man and the economically useful. 

CHAPTER VIII 

56. What are the three factors in production? 
Can they effect anything in production singly? What 
is meant by the division of labor? 

57. Show how the three factors of production are 
combined in each of the eight processes in the manu- 
facture of woolen goods. How does Adam Smith illus- 
trate the advantages of the division of labor? 

58. AVhat is the universal characteristic of modern 
industry? In what forms has the division of labor 
existed from the beginning of industrial civilization? 

59. How does the division of labor increase the ef- 
fectiveness of production? What are the three ad- 
vantages of the division of labor discussed by Adam 
Smith. Illustrate each one. 

60. How has increased specialization affected the 
period of preparation? What type of labor has been 
gradually su])erscded by the improvement in machine 
processes? Illustrate. 

61. Show how tlie extreme specialization in the meat- 
pa-cking industry is one made on the basis of skill. 



QUIZ QUESTIONS 433 

62. What are the three economies affected by divi- 
sion of labor? Show how the first two bring about the 
third. 

63. Why is specialization deplored? How can it 
be remedied and what is its great advantage? 

64. Is specialization confined to individual employ- 
ment? If not, why not? How can specialized industry 
meet sudden demand in the market ? 

65. Illustrate the effect specialization has upon costs. 

66. Show the difference in cost where different ma- 
chinery and different processes are used. 

67. Give an illustration from the manufacture of in- 
candescent burners. 

68. What is meant by continuous processes? How 
are they made possible? Illustrate. 

CHAPTER IX 

69. What is the effect of the location of an industry 
on its productivity? What determines the location of 
industry? What freight regulations have great in- 
fluence on the location of industry? 

70. What part does climate play in the location of 
industry? In what way may the climate handicap an 
industry ? 

71. What influence does the perishability of materials 
have upon the location of industrj^? 

72. How does the supply of fuel and water-power 
affect the location of industries? What new source of 
power is having an increasingly important bearing upon 
the location of industry? 

73. What phase of industry does the Armour's pack- 
ing plant illustrate? Give an instance of the utilization 
of surplus labor? 

I— -'8 



434. ECONOMICS 

74. Show what kinds of industries have their locations 
influenced by the residence of the consumer. 

7.5. Show how specialization of labor may determine 
the location of an industry. 

76. What types of industry are influenced in their lo- 
cation by the chea^Jness of labor? What is the "sweat- 
ing" system? 

77. Upon what general principle does industry tend 
to arrange itself ? What are the reasons for the opera- 
tion of this principle? 

78. Give the main reasons for Pittsburgh's impor- 
tance as the center of the iron and steel trade? 

79. Why is coke the best fuel for iron smelting? 

CHAPTER X 

80. Define large-scale production. Why is the term 
an indefinite one? Give an illustration of large-scale 
production. What has made large-scale production 
possible ? 

81. What effect has large-scale production had uj)on 
the centralization of industry? Illustrate. 

82. What are the advantages of large-scale produc- 
tion? Is large-scale production dependent on division 
of labor? 

83. In large-scale production is there a waste of by- 
products? What advantages does the large-scale pro- 
ducer enjoy as to improved methods? What is the 
chief economy of large-scale production? 

84. AVhat are the essential differences between large 
and small concerns? Illustrate. 

8.5. In introducing new functions into his business 
what does tlie large-scale producer expect to accom- 
plish? When is it practical to do so? 



QUIZ QUESTIONS 435 

86. What are the chief causes of the development of 
large-scale production? What influence has the mod- 
ern transportation system had upon large-scale produc- 
tion? 



PART II: EXCHANGE 

CHAPTER I 

87. What was the average output of the individual 
laborer in 1900? What did these figures prove? Why 
does the division of labor necessitate the exchange of 
products? What are the advantages of a facile ex- 
change ? 

88. What are the two forms of exchange? Is the 
first form of the exchange advantageous? Give rea- 
sons for your answer. What would be its effect upon 
the division of labor? 

89. What is meant by a medium of exchange? 
What led to its being employed? What are the four 
functions of money? 

90. Give examples of early forms of media of ex- 
change. What requirements did they fulfill? 

91. Give the characteristics of a medium of ex- 
change. Show reason for each characteristic. What 
has been found to be the most acceptable medium of ex- 
change? Why? 

CHAPTER II 

92. What is meant by a unit of value? Is it uniform 
throughout the world? What is the standard dollar? 



430 ' ECONOMICS 

03. By what do gold coins in the United States meas- 
ure their value? What are the tliree classes of paper 
money used in the United States? 

94. What can be said of the relative exchange value 
of paper money and coin in the United States? Why is 
paper money taken as an equivalent Of gold? 

95. How are national bank notes kept at par with 
gold? What are the three reasons for public confi- 
dence in the ability of the government to keep all kinds 
of money at par with gold? 

96. What is meant by bimetallism? What part has 
it played in the United States monetary system? What 
are the two uses of precious metals? How is their value 
regulated? 

97- What has been the history of the double standard 
in Europe as well as America? What has been the re- 
sult? 

98. Distinguish between convertible and non-con- 
vertible paper. What is the effect upon prices of the 
issue of non-convertible paper? How may it disturb 
foreign commerce? 

99. How long did a paper basis exist in the United 
States? What was its effect upon the value of a dol- 
lar and upon prices and wages in general? How and 
when was paper money redeemed? 

CHAPTER III 

100. What is the most important factor in exchange? 
Define credit in its various forms. 

101. What are the functions of a bank? What is 
tlie actual process of lending money as engaged in by 
banks? What two courses are open to the borrower? 
^Vre checks legal tender? 



QUIZ QUESTIONS 437 

102. What is the result of the use of credit as a 
medium of exchange? Illustrate. 

103. What is the clearing house? How does it fa- 
cilitate exchangei? Illustrate. 

104. How can a bank use checks above the value of 
its deposits. What are the credit funds of a bank? 

105. What limits* a bank's issue of promises to pay? 

106. To what extent are promises to pay used ? Why 
are these promises to pay taken as equivalent to gold? 
How large a percentage of the whole number of ex- 
changes is performed by the uses of credit? 

107. What are the reasons for public confidence in a 
bank's credit? Show .that the basis of confidence in a 
bank's credit is almost identical with that of govern- 
ment credit. What are the divisions of medium of ex- 
chan^ge in the United States? 

CHAPTER IV 

108. Under what law are most large banks organ- 
ized ? Give the principal features of our national bank- 
ing system. 

109. What are the powers of national banks? Why 
are they not allowed to hold real estate except under 
certain conditions? What are the regulations concern- 
ing United States bonds which banks must observe ? To 
what are they entitled thereby? Why did the govern- 
ment encourage the formation of national banks? 

110. What is meant by national bank reserve? What 
is the regulation concerning the banks not in reserve 
cities? Who conducts the business of a bank? What 
are the liabilities of the stockholders of a bank? 

111. To what extent is the Bank of England under 
national control? How great is its cash reserve? 



438 ECONOMICS 

112. In what way is the Bank of France dependent 
on the government? What amount of reserve does it 
keep? Why? 

113. What is the organization of the Imperial Bank 
of Germany? What are the regulations concerning 
note issue by independent banks in relation to the Im- 
perial Bank? How is the Imperial Bank controlled? 

114. What has been shown to be the attitude of the 
four governments (United States, England, France 
and Germany) concerning the issue of bank notes? 
How has each safeguarded its banking system in this 
respect ? 

115. What has been recently proposed in the United 
States concerning the issue of bank notes? Illustrate 
the causes and effect of a stringent money market. 
What are the proposed remedies? What does Profes- 
sor Johnson say as to the effect of asset bank notes? 

CHAPTER V 

116. Defme value from an economic view. What is 
meant by marginal utility? Illustrate. What relation 
does it bear to value? Show how the value of a com- 
modity is affected by demand and supply. 

117. In what is the value of a commodity always ex- 
pressed? Illustrate the fact that money is the only 
medium of exchange in modern business. Properly 
speaking, is money the thing toward which the producer 
is working? 

118. What is expressed by the price of a commodity? 
What is the incentive to economic activity? How is 
such activity rewarded? Distinguisli between cost and 
price. AVliat makes u]) the former? Whicli of these 
two is subject to the greatest fluctuations? What in- 



QUIZ QUESTIONS 439 

fluence does this fact have uj)on profits ? What conclu- 
sion may be drawn as to the relation between prices and 
profits? What is meant by a change in the level of 
prices ? What four circumstances are responsible for 
the disturbing effect of a change in the value of the 
standard? Show why this is so. Is a rise or fall of 
prices usually uniform? What disadvantages arise 
from this fact? According* to Professor Johnson, 
what would constitute the industrial millennium? Un- 
der what delusions concerning money and prices does 
the business man labor? 

119. Upon what do prices depend? Illustrate the 
price-making process. What are the functions of the 
Chicago Board of Trade? Show by an illustration 
how prices are determined in actual practice. 

120. What factors does the broker take into account 
in estimating the supply of wheat? How does the con- 
dition of the money market influence the suppty? 
What is a call loan? Why does the business man bor- 
row? 

121. What are the factors influencing demand? 

122. Ordinarily how do these factors operate? Illus- 
trate. Are prices sometimes affected when these fac- 
tors come into operation? Give reasons for your 
answer ? What can be said as to the stability or instabil- 
ity of prices? 

123. What is the ultimate factor in determining 
prices? What is the upper limit of prices? What is 
the lower limit? What happens when the lower limit 
is reached? Illustrate the effect of declining prices 
upon production. 

124. What has been the fluctuation of prices since 
1850? What has been the cause of this fluctuation? 
Why are the fluctuations of price likely to continue? 



440 ECONOMICS 



CHAPTER VI 

125. What is the international medium of exchange? 
In international payments are there large shipments of 
gold ? 

126. What is meant by the statement that Fall River 
is a cotton city? In what ways is domestic exchange 
affected? What conclusion is reached as to the pay- 
ment for domestic imports and exports? 

127. How does the method of domestic exchange cor- 
respond to the method of international exchange? 

128. In what two ways can debts between two coun- 
tries be liquidated? What method is usually employed? 

129. Explain the working process of buying and sell- 
ing foreign credit? Show how they correspond to 
methods employed in domestic business. 

130. How do Americans traveling in Europe settle 
their bills? What other foreign payments does the 
United States make? 

131. Why must the United States export a large 
surplus of commodities? Give statistics. 

132. What is meant by the international income ac- 
count? What appears on the debit side and what on 
the credit? Give reasons for fluctuation in the value 
of foreign exchanges. What are the limits within 
which the value of exchange may vary? 



QUIZ QUESTIONS 441 

PART III: DISTRIBUTION 

CHAPTER I 

133. Give an illustration of the united working of 
the three factors of production. What are the four 
interests in every business? 

134. What is the entrepreneur? What is his func- 
tion in the business world? What is his relation to dis- 
tribution of the social income? 

135. What are the three forms the entrepreneur may 
assume? Why is individual ownership undesirable? 

136. What is a partnership? How is it formed? 
What are the articles on co-partnership? How are 
they drawn up ? 

137. What are the five kinds of partners and the 
characteristics of each? What are the liabilities and 
rights of a partner? What is meant by the capital of 
the partnership? Why is the name of a partnership 
protected by law? 

138. What is the most important obligation which 
partners owe to each other? What are the limitations 
of a partner's authority? How are proceedings against 
partnerships carried on? 

139. How can a partnership be dissolved? 

140. Define a corporation. What are its powers 
and liabilities? What is the relation between stock- 
holders, directors and management? What is a 
charter of a corporation? What powers have the 
directors? 

141. What are the advantages of a corporation over 
a partnership? How is the control of corporate affairs 
held? 



442 ECONOMICS 

142. What is the most important advantage of a cor- 
poration ? Is a corporation a popular form of business 
organization in the United States? 

143. Show by an illustration from the Reading Coal 
and Iron Company how an industrial income may be 
distributed. 

144. What are the five general heads under Avhich 
distribution is made. 



CHAPTER II 

145. What is one of America's distinctive contribu- 
tions to the business world? What is the chief function 
of the organizer? What type of man makes the best 
organizer ? 

146. What knowledge must the organizer possess? 

147. What industrial conditions in the United States 
are the result of the work of organizers? What is his 
position in and importance to the community? In what 
way has he abused his position? 

148. How does the modern organizer win his place? 

149. What relation does the manager bear to the or- 
ganizer? What are the duties of the manager? Why 
is his position less difficult than that of the organizer? 

150. How are managers trained in the United 
States? Show how industrial conditions are favorable 
to the development of managers. 

151. What are the duties of a boss? What methods 
does the boss employ to increase products? What type 
of man makes an efficient boss? 

152. Name five classes of employes usually found in 
every business. ^Vhat is the distinction between skilled 
and unskilled labor? 



QUIZ QUESTIONS US 

153. What are the classes of unskilled labor? Un- 
der what management and supervision do they work 
most successfully? 

CHAPTER III 

154. Define wages. Distinguish between real and 
money wages. What is the relation of wages to prices ? 
How does this explain the difference in country and city 
wages ? 

155. Does the Transvaal afford an excellent illus- 
tration of the influence of prices upon wages? Why is 
it necessary to import negroes to work mines in the 
Transvaal? 

156. How do fees differ from wages? 

157. What fixes the rate of wages? What deter- 
mines the lower limit of the rate of wages? 

158. Upon what does the demand for labor of each 
class depend? What influence do modern systems for 
cost keeping have upon efficiency? 

159. How does the condition of the market affect the 
demand for labor ? Show how competition between em- 
ployers acts upon the demand for labor. 

160. What is meant by the supply of labor? What 
is the chief source of unskilled labor in the United 
States? What influence has this fact had upon immi- 
gration laws? 

161. What figures are given concerning the number 
of immigrants in the United States? What may be 
said for the average immigrant? Does the immigrant 
rise in the ranks of skilled labor? 

162. What factors affect the supply of labor? Illus- 
trate. What is the relation between business depres- 
sion and deficiency of labor? 



4i4 ECONOMICS 

lGt3. Upon what does the supply of labor m each 
class depend? Illustrate. 

164. Give the qualifications for the unskilled labor- 
ers. Give the qualifications for a good section hand 
on a railroad. Give the qualifications for a railway en- 
gineer. Show how these qualifications influence the 
supply of labor in each class. Show their relation to 
the profits of the concern. 

165. Give the qualifications for a railway traffic man- 
ager. What is the relation of salary to the actual value 
of his services? 

166. What has been the career of most railroad pres- 
idents ? 

CHAPTER IV 

167. What is meant by standard rates of wages? 
What is the effect of standard rates on efficiency? 
What would be the ideal method of paying wages? 
Why ? How are the fixed expenses per unit of product 
ascertained? 

168. Give statistics showing loss of time through 
idleness in any factory. What is the best way to rem- 
edy this? Will supervision do so? 

169. What are the three systems of wage payment 
calculated to increase efficiency?' What are the objec- 
tions to profit-sharing? 

170. Why is profit-sharing unfair to the employer? 

171. In what kind of industries does the piece work 
system operate with most success? Why? 

172. Wliat is tlie serious objection to piece work? 
What makes this system un])oi)ular with cni])l<)vcs? 
What often gives the em])l()yc an unfair adxantage 
over the employer under the piece work system? 



QUIZ QUESTIONS 445 

173. What is the best method of mcreasiiig an em- 
ploye's efficiency? What is the premium system? 
Ilkistrate the difference between the premium system 
and the piece work system. 

174. Show how the premium system operates upon 
the introduction of new methods. 

175. What is the effect of this system on the ma- 
chinery? How have improved machine methods bet- 
tered the condition of the employe? 

176. In what two ways does the risk incurred in cer- 
tain operations influence the supply of labor? Illus- 
trate the dangers met with in coal mining. What 
wages should the miner command? 

177. What is the effect of the manufacture of bleach- 
ing powder upon the laborer? 

178. What has the chance of success to do with the 
supply of labor? Illustrate the effect of social posi- 
tion on the supply of labor. What influence does an 
opportunity for advancement have upon the supply of 
labor? How do these three factors affect wages? 
What is the effect of the sole or partial dependence of 
labor on wages? 

179. Do women's wages illustrate this dependence of 
labor on wages? How does the sweating system bear 
upon the matter? What other factors determine the 
rate of wages paid to women? Why do women teach- 
ers not receive the same wages as men? 

CHAPTER V 

180. Give the definition of and purpose of the trade 
union. What is the justification for the trade union? 
What are the two kinds of trade unions? Illustrate 
each. 



446 ECONOMICS 

181. Show the rcsemhhiiice hetween the general 
scheme of orgai"iizatioii of a trade union and our poht- 
ical organizations. What does the jurisdiction of each 
branch of a union include? Why are there subdistrict 
unions ? 

182. What is the relation of the individual member 
to the union? Is it a democratic organization? 

183. What are the powers, functions and proceedings 
of a convention of the national union? 

184. According to the preamble of the Constitution 
of the United JMine Workers' Organization, what is the 
general purpose of the trade union? What objects are 
included under this general purpose? 

185. What is the endeavor of the trade union in re- 
gard to the wages of its members? Give the main 
provisions of an agreement between employer and em- 
jDloyes as settled by the union. What is the legal status 
of the unincorporated trade union? Why do employes 
favor the method of collective bargaining? 

186. What is the chief concern of the local union? 
What is a walking delegate? What happens if the lo- 
cal union does not settle the matters with the employer? 

187. What is a strike? In a strike what is the first 
business of the union? How is it accomplished? 

188. What is meant by picketing and what is its pur- 
pose? Illustrate. 

189. What are the social forces brought to bear on 
certain cases by the union ? What term of reproach has 
been coined by the union? 

190. Give an illustration of the ostracizing power of 
the union? What forms does the persecution of the 
"scab" take? 

191. Why is a strike a powerful weapon \n tlie hands 
of the union? What are meant by defense funds? 



qUrZ QUESTIONS 447 

192. What is the success of the strike dependent upon 
very largely? Under the system of competition, what 
disadvantage does the employer face? 

193. Under a system of competition what advantage 
does the union take of the employer? In the absence 
of competition how would employers be inclined to act 
toward the union? 

194. Why is common action among employers im- 
possible? Why is combination of employers desirable? 

195. Why is collective bargaining a better method of 
settling difficulties between employe and employer than 
the strike? Should the state interfere in such matters? 

196. What are some of the minor activities of the 
trade union? In what way do they restrict the supply 
of labor? 

197. What is the employer's attitude toward the 
closed shop? What does one employer say of the 
"closed shop"? 

198. What constitutes the most serious indictment 
against labor organizations? Give illustration of the 
unreasonable demands of a union. 

199. How may a union limit the output? What is 
the union's attitude towards labor-saving machinery? 
What defense do they make for this attitude? What 
can be said of the validity of this defense? 

200. Does the union favor the best method of in- 
creasing wages? What is the most promising field for 
the development of trade unions? Give an example of 
what has been done here in this field. 

CHAPTER VI 

201. Define rent. What is a lease ? Give examples 
of the different kinds of leases. 



448 ECONOMICS 

202. Give the various forms of rent payments. Il- 
lustrate each. On what basis are mineral royalties 
fixed ^ 

203. How does a tenant go about the management of 
a farm? What sum will he pay as rent? 

204. \Miat are the primary causes determining ag- 
ricultural rent? What beside the fertility of the soil 
is of importance in determining rent? 

205. Show the influence of price on rent. 

206. Why does land in the neighborhood of large 
cities command large rentals? What has diminished 
the importance of location in relation to rent? 

207. What determines the rent of mines? Give an 
example. 

208. How are ground rents determined? What is 
the value of land used for building purposes based 
ui^on? How do incomes from ground rents vary? 
Cxive the various grades of ground rentals. In the lo- 
cation of retail stores what determines rent? 

209. How does the opportunity for the dis^^lay of 
goods affect the rent? 

210. Ilhistrate the effect of demand for commodities 
upon location. What is the chief principle of ground 
rents? Give an illustration from a New York suburb 
of the effect of location upon rent. How have street 
railways affected ground rents? 

211. Are building rents determined on the same prin- 
ciple as ground rents? What are some of the most 
important factors determining building rents? 

212. What is the economic rent of a piece of land? 
What is meant b}^ "no-rent" land? 



QUIZ QUESTIONS 449, 

CHAPTER VII 

213. To what extent does interest figure in the ex- 
pense accounts of corporations? 

214. Why is interest paid? 

215. What must the borrower have before he can get 
control of capital? Define interest. Why is the defi- 
nition given for interest not correct ? What does a 
bank lend or sell to its depositors? Illustrate. 

216. What is the business of banking? What defini- 
tion of interest covers all excesses? Illustrate. 

217. What hold does the creditor have upon the 
debtor? What are security contracts? What part 
does the endorser play in a securitj^ contract? 

218. What is a mortgage? Illustrate the nature of 
a mortgage grant. What is its advantage to the cred- 
itor ? 

219. What is collateral securitj^? How is the busi- 
ness of giving collateral or mortgage security trans- 
acted? 

220. How is the discount on the sale of promises to 
pay expressed? What are the two general classes of 
loans ? Why is interest low on call loans ? 

221. AVhat are short time commercial loans? By 
whom are most of these short time and commercial loans 
offered? In what two forms are these loans made? 
Compare the English system of loans with the Amer- 
ican. 

222. What are the three classes of long time loans? 
What is the purpose of loans on real estate security? 
What are bonds? How is the interest on bonds paid? 
What is the expectation of the corporation issuing bonds 
in regard to them? Upon what does the term of a 
bond depend? 

1—29 



45Q ECONOMICS 

223. What are public bonds? Why are they issued? 
What is their security? What happens in case of de- 
fault? 

224. Who purchases long-term obligations? What 
is the object of the investor? Who are the large in- 
vestors in the United States? 

225. How do rates of interest vary? Upon what 
does the rate of interest paid by a corporation depend? 
Illustrate. 

226. What are the causes determining the rate of in- 
terest? Illustrate. How are these graded as to the 
preference shown them by investors? How does de- 
mand affect interest? Why has the interest rate onMI 
United States Government bonds been decreasing? ~ 

227- What are the causes which explain the difference 
in the desirabilitj^ in the various classes of loans? Why 
is double-name paper better than single-name paper? 
When and whj^ were the bonds of the Pennsylvania 
Railroad Company more secure than the bonds of the 
United States Government? What is the standing of 
bonds of mining companies? 

228. When is interest low? Illustrate. What is the 
result of a rise in prices upon interest? 

229. What effect do the limitations to the expansions 
of bank credit have upon rates of interest? What is 
the effect upon prices? What is the relation of rates 
of interest to prices? 

CHAPTER VIII 

230. By what formula may the profits of any busi- 
ness be calculated? Why are profits smaller than is 
commonly supposed? 



QUIZ QUESTIONS 451 

231. What does the farmer consider to be his profits? 
Is he right? What is true of profits in agriculture? 

232. Are manufacturing and raikoad profits large 
or small? Why is this so? 

233. In estimating the profits of a business what fact 
is ignored? What is the influence of comj)etition upon 
profits ? 

234. Illustrate the effect of growing competition on 
prices. What does the average producer consider to be 
his running expenses? Why is he unwilling to close 
down his plant? 

235. What testifies to the fact that large profits may 
be and are being made in the United States? What 
are the five sources of profits? 

236. How have most great American fortunes been 
made ? 

237. What is the primary reason for large and small 
profits? Show the place of brains in business. How 
did the Carnegie Steel Company realize large profits? 

238. What are the advantages of the Carnegie Steel 
Company? Why did the concentration of their mills 
give the Carnegie Steel Company an advantage? 

239. What was the policy of the Carnegie Steel Com- 
pany as to equipment? Upon what did the efficiency 
of the Carnegie Steel Company depend? How did the 
Carnegie Steel Company get control of the market and 
its prices? What is the real factor in business success? 

240. What effect has extraordinary demand on 
profits? Illustrate. How can the producer take ad- 
vantage of the fact that costs of production do not 
change as rapidly as prices ? 

241. What is meant by speculation? How is it car- 
ried on? What is true of the losses in comparison with 
the gains through speculation? 



452 ECONOMICS 

242. What is the surest and safest way to earn large 
profits? AVhat is monopoly of ability? 

243. Illustrate the monopoly of large industries. 
WJiat are the advantages of a large producer? How 
do monopoly prices differ from competitive prices? 

244. What is a franchise? Illustrate. What is a 
patent? 

245. How is a monopoly of quality obtained? What 
part does advertising play in building up a monopoly? 
Why is this form of monopoly most desirable? 

CHAPTER IX 

246. How can it be said that every man, woman and 
child in the United States pays taxes? What are the 
t^\ofold functions of government? Give examples of 
the inactive functions of government. What are the 
two classes of service included under the functions of 
government? Give examples of each. 

247. What is a tax? What is the most important 
significant feature of a tax? 

248. What is the basis of taxation? 

249. What are the maxims of taxation? 

2.50. What is the general division of taxes? How is 
each division levied? 

251. What are the advantages of direct taxation? 
Wliat are tlie disadvantages of direct taxation? 

252. Wliat are the advantages of indirect taxation? 
What are the disadvantages of indirect taxation? 

253. AV^hat is tlie basis of the general property tax? 
How is it collected? What are the objections to the 
general property tax? What is the only argument 
wliicli can ])e advanced in su])])ort of the general prop- 
erty tax? How may it be somewhat remedied? 



QUIZ QUESTIONS 453 

254. What is the basis of the income tax? What are 
its advantages? What are the objections to the income 
tax? What has been the history of the income tax in 
the- United States? 

255. Who has been the most permanent advocate of 
the single tax? Upon what does he base his theory? 

256. What does the single taxer propose? How do 
they expect to accomplish this purpose? What is to be- 
come of the other fixed taxes? 

257. What are the fiscal objections to the single tax? 
Why could it not be collected ? 

258. What are the economic objections to the single 
tax? Why would it be a socialistic measure? 

259. Define ii^heritance tax? What are the justifi- 
cations for an inheritance tax? Upon what principle 
are inheritance taxes levied in various countries? Why 
has this form of taxation been generally employed in 
the United States? 

260. What are the two general classes of indirect 
taxes? What are the three methods employed in ex- 
cise taxation? Explain the workings of each? Upon 
what articles should excise duties be levied? 

261. What are customs? What is the purpose of 
customs duties? Upon what principle should they be 
levied? Distinguish between specific duty and an ad 
valorem duty? 

262. What would be the ideal system of taxation? 



454< ECONOMICS 

PART IV 

CHAPTER I 

263. What is the importance of transportation? 

264. What forms of transportation have given rise to 
problems in their growth ? What was the first raih'oad ? 
When did the process of "hnear consohdation" take 
place? What was the period of expansion of railwaj'' 
mileage? What evils resulted from railroad compe- 
tition? What has characterized the period up to the 
present time ? 

265. What two points must be bornean mind in order 
to understand the real nature of the railroad problem? 
AVhat is gained by the diminishing expense of the rail- 
road? 

266. Why does selling transportation 'differ from 
selling ordinary commodities? How has the govern- 
ment made possible the present American transporta- 
tion system? Why should railroads be under public 
regulation? What two regulations does the state place 
on railroads? ^ 

267- Why is the problem of discrimination difficult 
to settle? What are the three kinds of discrimination? 
♦V^ho is the man usually discriminated against? Wliy 
are the effects of discrimination between places more 
far-reaching than discriminations between persons? 
Illustrate. What effect does discrimination on com- 
modities have upon industry? As a rule how does the 
traffic manager arrange rates? 

268. What were the first steps in railroad legisla- 
tion? WHiy were they ineffective? What lesson had 
to be learned? 



QUIZ QUESTIONS 455 

269. What was the first act of Congress in reference 
to raih'oads? What five pomts did it cover? How 
were the provisions of the law to be enforced? 
■ 270. What was the chief effect of the Elkins Law? 

271. What has been the result of the Hepburn Act? 
What problem has been settled? What new problem 
remains ? 

272. What may be said for government ownership 
of railroads? What are the important arguments in 
favor of private ownership ? 

CHAPTER II 

273. What is the permanent basis of international 
trade? Illustrate. What economic variations cause a 
difference in the output? What is the point at issue 
between the protectionists and the free trader? 

274. What are the two types of tariff? What are 
the objections to each type? 

275. How does a protective tariff operate? Under 
a prohibitive tariff who in practice pays the tax? 

276. What do protectionists attack as to the burden 
of the tax? How can we justify the attitude of the 
country that taxes itself at an early date? Why is 
there a law sustained at first? 

277. What is meant by dumping? How does it 
come about? Is it permanent? Give an illustration? 
Is dumping a dead isue? 

278. Compare the steel prices in England and in 
America? What would very probably have happened 
had the United States not had a protective tariff? Why 
is price-cutting essential to dumping? 

279. How can the producer afford the expense of 
dumping? Illustrate. 



456 ECONOMICS 

280. What is the significant figure in the expendi" 
tures of a steel mill? 

281. What effect does the dumping of the United 
States Steel Corporation have upon English producers ? 
How does it furnish the English protectionist its sanest 
argument ? 

282. What prevents dumping? What would hap- 
pen if the tariff law were removed on British and Ger- 
man steel? What circumstances would hamper for- 
eign producers? 

283. How would free iron and steel prove an un- 
disguised blessing to the American producer? What 
solution to the tariff problem has been suggested? Is 
it to be expected that the United States will abandon 
a protective system? What is the open question in tlie 
tariff agitation? 

284. What affect have the high tariffs passed at the 
time of the Civil War had upon our industries? Why 
does the American producer at present feel the need for 
reciprocity ? 

285 What are the three chief types of tariff sj^stems? 
In what respects is the German system a satisfactory 
one? Why could it not })e readily introduced into the 
iVmerican system of government? What system seems 
best suited to American conditions? Why cann.ot the 
tariff problem be definitely settled for all time? 

CHAPTER III 

28o. How did the trust movement begin? What fol- 
lowed the organization of the Sugar Trust? Up until 
1893 what were the principal combinations listed on the 
New York Exchange? 

287. From ^vlult vear does tlie real tnist movement 



QUIZ QUESTIONS 457 

date? What has been the growth of the trusts in the 
field of consumption goods? What is the probable ori- 
gin of the trust movement? What were the financial 
and industrial conditions after the panic of 1893? 

288. What effect did the return of prosperity have 
upon the trusts ? Illustrate the rise in stocks. Did the 
demand for stocks rise? 

289. What is the function of the promoter? Why 
were the railroad stocks in 1898 no longer available? 
What was the result ? What was the new outlet for in- 
vestment? During the times of depression what has 
competition meant to the producer? 

290. What ■ attempts had been made before 1898 to 
lessen the recognized evils of competition? How does 
the pool hope to secure profitable prices? What is the 
relation of different managements to the pool? 

291. What is the essential weakness of the pool? 
Why is the successful management of a pool difficult 
during a period of business depression? Give an exam- 
ple. 

292. In a trust how is agreement among managers 
secured? To what was the holder of trust certificates 
entitled? How was permanence of control secured? 
How did the trust furnish a more satisfactory restric- 
tion of competition? 

293. Why could not the details of trust organiza- 
tions be concealed? What legal basis was there for the 
tax on the trusts? What was the first suit broyght 
against the trust? What did the results of this first law- 
suit show? How did the power of the state to revoke 
corporation charters affect the trust? 

294. Before 1889 what was the general rule as to the 
purpose of organized corporations? Upon what change 
in this purpose did the future of this trust depend? 



458 ECONOMICS 

What changes need be made in the organization? 
What would be the result? Under what conditions 
could the holding company dissolve corporations? 

295. Did the holding company differ in principle 
from the legal trust? What legal difficulty confronted 
the trust? How was it overcome? 

296. What are the provisions of the Corporation Law 
of New Jersey? What were the consequences of this 
statute ? 

297. How was the legal position of the holding com- 
pany finally established? What was the decision of the 
court as to the Sherman Act? What was proved to be 
the solution of the trust problem? How was it legally 
protected ? 

298. How did the advantages of combination come 
to be generally recognized? What was the result of 
this favorable attitude toward the trust? What is the 
kernel of the so-called trust problem ? 

299. What are the unfair advantages of the trust? 
What has been one of the biggest factors in the past in 
hastening centralization in industry? What examples 
are there? 

300. What evidence has been given as to discrimina- 
tion in prices? What information did the industrial 
commission secure as to discrimination in local markets? 
What are the probable causes of these variations in 
price? 

301. How do the trusts pocket the products of other 
producers? Give example. 

302. What is the basis of popular antagonism to- 
ward trusts? What does Professor Jenks conclude as 
to trust prices? What effect have the trusts had upon 
the passage of tariff bills? What lias public opinion 
forced the trusts to do in order to prevent the corrup- 



QUIZ QUESTIONS 459 

tion of public officials? What influence have the rail- 
roads in politics? 

303. What effect has stock manipulation on public 
welfare? Why cannot the investing public gain ade- 
quate knowledge as to what will be a safe investment? 
How do stock manipulations affect the small investor? 
How is a fictitious value given to stock ? 

304. What were the first anti-trust laws ? What was 
the decision of the United States Supreme Court as to 
these laws ? How did the state fare ? 

305. What does the Sherman Antitrust Act de- 
clare? 

300. To what cases has this law been mainly applied ? 
Why has it failed? What is interstate commerce as 
interpreted bj the United States Supreme Court? 
How does the trust escape both state and federal juris- 
diction? Why are the state governments powerless in 
controlling the trusts? How can any state action be 
rendered useless? 

307. What is the aim of corporation control at pres- 
ent ? How is this to be brought about ? Who is at the 
head of the Bureau of Corporations at present ? What 
are his powers ? 

308. In what three ways may the trust problem be 
solved ? 

CHAPTER IV 

309. Is the problem of monopoly identical with that 
of the trust? Which is the broader terms? How is 
monopoly represented in the popular mind? What is 
the view of certain economists as to^ monopoly? 

310. What is the opposing view as to monopoly? Il- 
lustrate. 



460 ECONOMICS 

311. Show how progress results in monopoly? How 
should the social surplus be divided? How does the 
present social surplus afford a monopoly fund? Illus- 
trate the fact that a monopoly is never destroyed. 
What conclusion can be drawn as to the extent of 
monojjoly power? 

312. What is the real nature of the monopol}'^ prob- 
lem? Illustrate. How does monopoly take advantage 
of the variation in social income? 

313. How would you apportion the social surplus? 
How do they propose to pay wages? 

314. What are the objections to government regula- 
tion of prices? What are the four classes of property 
that can claim a large share of the social surplus? 
AVhat should be the aim of those who wish to reform 
monopoly power? 

315. What are the limitations of monopoly power? 
Why should the trust movement of recent years be 
considered a social gain? What effect has the growth 
of industrial combination had upon monopoly power? 

316. What safeguard has the consumer against the 
power of monopoly? Illustrate. How may the trust 
movement be considered socialistic? In what way may 
the consumers be compensated for the loss of their free 
income ? 

317. What is the solution of the monopoly problem? 
Illustrate its working out. 

318. What is meant by the power of substitution? 
Ex])lain the sympathetic movement of j^rices. What 
effect does this movement have upon monopoly power. 
Illustrate. 

319. Wliy cannot the Standard Oil Company exer- 
cise its monopoly power to the fullest extent? In what 



QUIZ QUESTIONS 461 

way did the power of substitution affect the Beef 
Trust? 



CHAPTER V 

320. How may social welfare compel government 
regulation of prices? 

321. Upon what does the existence of social unrest 
depend? What social problems has this nation to face? 
What is the strength of the socialist party in this coun- 
try? 

322. What five objections does the socialist make to 
the present order of things? What does the socialist 
mean by exploitation? What is its cause? How does 
socialism deal with monopoly power? 

323. What criticism does the socialist make upon the 
present nature of society? 

324. In what way is the wastefulness of modern so- 
ciety displayed? 

325. What evils spring from competition? 

326. What is the socialistic problem? What results 
would it bring about? What would be the benefits to 
the individual? What would be the relation of the 
individual to the government? To what extent does so- 
cialism attack the institution of private property? 

327. What is the relation of socialism and the single 
tax? Upon what does the socialist base his belief in the 
single tax? 

328. What would the institution of socialistic govern- 
ment require? What does H. G. Wells consider the 
necessary antecedent to the adoption of socialism? 
What course is open to socialists at present ? 

329. What is the tendency in modern opposing 
schools of thought? What has caused the change in the 



462 ECONOMICS 

socialist attitude? What features in modern industrial 
life show the progress from the old laissez f aire theory 
of government? What will very probably be the next 
step toward the realization of a socialistic program? 

330. Has socialism abandoned some of its old tradi- 
tions ? Illustrate. 

331. Does the modern socialist believe in a democ- 
racy? What is the future of the whole socialist move- 
ment? What is the weakness of socialism as an imme- 
diate and practical line of action? 



CHAPTER VI 

332. What two conflicting points of view constitute 
the labor problem ? 

333. What fact about the union must be realized be- 
fore taking up a discussion of the labor movement? 
What are the aims of the union? When wages are re- 
duced to the mere cost of production, what fact is ig- 
nored? What has the imion to combat? What would 
be the result of a free competitive system in the labor 
market? Illustrate. 

334. What kind of a bargainer is the single-handed 
wage earner? Why? 

335. What two secret rights clash in carrying out the 
closed shop policy ? 

336. What is the boycott? What forms may the 
boycott take? What may be considered reliable forms 
of the boycott? How has objection to the boycott shown 
itself? 

337. What justification is there for objection to the 
introduction of new machinery? 

338. What efforts have been made to restrict trade 



QUIZ QUESTIONS 463 

unions? What is an injunction? Why is it effective? 
What hmits the punishment for offenses against in- 
junctions? Upon what does the power of the union 
rest? How has the injunction curtailed this power? 
How have employers curbed the power of the union? 
Give an example. 

339. What are the objections to strikes and lockouts? 
What four schemes for settling industrial disputes have 
been proposed? Why is the collective bargain method 
ideal? Why is the "arbitration board" method less sat- 
isfactory? What is the justification for compulsory 
arbitration ? Upon what does the proper solution of the 
labor problem depend? 



INDEX 



Ability, as source of profits, 391-393. 
Agriculture, 18. 
Alvord, J. W., 75. 
American Merchant Marine, 175. 
American exports, 175-176. 
Archbold, 367. 
Arbitration, 435. 
Articles of copartnership, 184. 
Asset currency, see Bank note 
issues. 



B 



Baldwin Locomotive Works, 47, 310. 

Apprentice system of, 48-49. 
Bank, 134. 

Directors of, 144. 
Bank credit. 

Basis of, 141. 

Limitations of, 140, 385. 
Bank of England, 145. 
Bank of France, 145-146. 
Bank note issues. 

On security of bank assets, 147. 

Protection of, 146-147. 
Barter, 131. 
Beef^Trust, 391. 
Bimetallism, 138-130. 
Bills of exchange. 

Causes influencing price of, 177- 
181. 
" Black list," 413. 
Blackstone, 3, 3. 
Blanc, Louis, 11. 
Bleaching powder. 

Manufacture of, 337-333. 



Bonds, 

Corporate, 375-377. 

Public, 377. 
Boss, 

Duty of, 199. 
Boycott, 418-419. 

Brotherhood of Locomotive Engi- 
neers, 353-353. 
Buffalo Street Railways, 34. • 
Bullion, see Gold. 
Bullock, C. J., 77-79, 116-119, 313- 

314, 337. 
Bureau of Corporations, 377. 
Business, 

Demand for university men, 45. 

Importance of training for, 43. 
Business Organization, 

Class in, 46. 



Cabet, 11. 
Capital, 

Agent of production, 17, 19. 

Consumption of, 76. 

Definition of, 64. 

Maintenance of, 73-74. 

Service in production, 65-67. 
Capital goods, 65. 
Capitalistic production. 

Indirect, 67-68. 

Superior to direct production, 68- 
71. 
Carlton, Frank J., 40-41. 
Carnegie, Andrew, 381. 
Carnegie Steel Company, 113, 391. 
Chicago Board of Trade, 159. 

Account of transaction in wheat, 
160. 



465 



466 



INDEX 



Child labor. 

Indirect effects of, 54. 

IneflBcient and uneconomical, 55- 
56. 

Interest inj 405. 

Moral and physical effects of, 53- 
54. 

Problem of, 52-56. 
Citizens' Industrial Association, 423. 
Clearing House, 137-139. 
Climate, 

Influence on industry, 101. 
Closed shop. 

Employers' attitude toward, 249. 

Fallacy of, 249-250. 

Policy of, 417. 
Coal, 

Compared with coke, 107-108. 

Mining, dangers of, 226-227. 

Pennsylvania fields, 424. 

Slav invasion of anthracite mines, 
416. 

Source of power, 22, 23. 
Coke, see Coal. 
Collateral loans, 273. 
Collective bargaining, 423. 
Colorado Fuel and Iron Company, 

32. 
Conunodities used as media of ex- 
change, 123. 
Conmnmism, 9. 
Competition, 

Combination of employers impos- 
sible under, 247i 

Labor, 416. 

Restricted l)y trusts, 358. 
C()m))trollcr of the Currency, 142. 
Conciliation, 423. 
Consumers' League, 419. 
Consumption, 

Forms of, 77-79. 
Consumption goods, 65. 

Affected by trust movement, 350. 
Continuous processes, see Division of 
labor, 

Advantages of, 84. 
Copartnership, articles of, 184. 
Cornell, 42. 



Corporation, 

Advantages of, 187-188. 

Control of, 188. 

Limited liability of, 188-189. 

Powers of, 187. 
Corporation charter, 187. 
Corporation Law of New Jersey, 

362-363. 
Costs, 154. 
Credit, 
- Definition of, 13^ 

Forms of, 133-134. 

Funds, 139-140. 

Instruments, 140. 
Customs duties, see Taxes. 



D 



Demand, 

Factors influencing, 162-163. 

A source of profits, 295-296. 
Depreciation, 74. 
DeQuinccy, 149. 
Discrimination, 367. 
Division of labor, 81-99. 

Advantages of, 84. 

Economies effected by, 92-94. 

Illustration from woolen mill, 81- 
83. 

Increased efficiency through, 84- 
88. 
Dodge, J. M., 41. 
Dumjjing, 

Evils of, 338-339. 

Present problems, 339-340. 

Prevented l>y tariff wall, 343-344. 
Double standard, 129-130. 



E 



Economics, 

Definition of, 1-2. 
Economic goods, 1. 
Electricity, 102. 
Elkins Law, 327-328. 
Ellis, George H., 249. 
Eminent domain, 6. 

Employers' associations, 421-423. 



INDEX 



467 



Engels, 404. 
Entrepreneur, 182-183. 
Exchange, 

An offsetting of credits, 173-174. 

Essential elements of, 173. 
Excise, see Taxes. 

Reasons for, 120-122. 
Exports, 175-176. 



F 



Fees, 

Distinguished from taxes, 304. 

Distinguished from » wages, 204- 
205. 
Fetter, Frank A., 371. 
Financial Review, 351-352, 355. 
Foreign exchange, 169-181. 
Form utility, 14-16. 
Franchise, form of monopoly, 300. 
Free goods. 

Transformation of, 20. 
Free trade. 

Argument for, 336-338, 344. 



G 



General property tax, see Taxes. 
George, Henry, 310. 
Gide, Charles, 164-165. 
Gold, 

Export of, 169. 

International medium of exchange, 
169. 

Uses of, 129. 
Goschen, Lord, 177-181. 
Government, 

Functions of, 303-304. 

Guarantees, basis of public con- 
fidence in, 127. 
Great Northern Railroad, 255. 

H 

Hurd, R. M., 263. 
Hepburn Act, 328. 



Hillquit, Morris, 402. 

Holding Company, see Trusts. 



Illinois Steel Company, 32. 
Immigration, 208-209. 
Income tax, 309-310. 
Inconvertible paper, 130-131. • 

Individualism, 397. 
Industrial betterment, 30-38. 
Child labor laws, 35-37. 
Extra-business relations between 
employers and employes, 37-38. 
Factory legislation, 34-35. 
Safe and sanitary surroundings, 

31. 
Views of a work's manager, 33- 
34. 
Industrial combinations, growth of, 

386. 
Industrial Commission, 367. 
Industrial income. 

Claimants to, 191-192. 
Distribution of, 189-191. 
Industry, 
Average individual output in 

manufacturing, 120. 
Problem of women in, 60-62. 
Standardization of, 57. 
Transference to factories of home, 

58-60. 
Women in, 56-62. 
Inglis, H. D., 7. 
Inheritance tax, see Taxes. 
Interest, 

Causes determining rates of, 279- 

282. 
Change in rate of, 283. 
Definition of, 269. 
Identity with discount, 271. 
Rates on loans, 278. 
International Association of Ma- 
chinists, 247. 
International exchange, 169-181. 
Aggregate amount in 1907, 169. 
Process similar to domestic ex- 
change, 171. 



468 



INDEX 



liitirnational income account, 17G- 

177. 
International trade, basis of, 333- 

333. 
Interstate Commerce Commission, 

3i28-331. 
Interstate Commerce Act, 326. 
Investors, 277-278. 



Jevons, Stanley, 165. 
Johnson, Alvin S., 151-152. 
Johnson, Joseph French, 148, 155- 
159. 

K 

Kirby, John, Jr., 422. 
Knapp, Judge, 331. 



Labor, 

Agent of production, 17. 

Analysis of, 28-29. 

Boycott, 418. 

Classes of, 200-202. 

Competitive system, 416. 

Demand for, 206-208. 

Division of, 81-99. 

Effect of machine industry, 46, 
89. 

Efficiency of, 29. 

Mental efficiency of, 39-50. 

Movement in America, 414. 

Moral efficiency of, 50-51. 

Problems of, 413-425. 

Subdivision of, 56. 

Supply of, 208-211, 226. 
Labor-saving machinery, 251-252. 
Laissez fairc, 404. 
Large-scale production, 

Advantages of, 113, 341-342. 

Causes of develo])ment, 115-116. 

Compared with small-scale pro- 
duction, 109-110, 114-115. 

Economies of, 112, 117-119. 



Loans, 

Basis of classification, 282-283. 

Classes of, 274. 

Collateral, 273. 

Long time, 275-278. 

Mortgages, 272. 

Real estate, 275. 

Short time commercial, 274. 
Location of industry. 

Changes in, 105. 

Determining influences, 100-10 k 

Pittsburgh as example, 106-107. 

M 

Machinery, • 

Advantages of improved, 224-225. 
Labor-saving, opposition to, 251- 
252, 419. 
Man, 

Agent of production, 18. 
Comparison of jjrimitive and civ- 
ilized, 63-64. 
Manager, 

Conijiared with organizer, 196- 

197. 
Duty and training of, 197-199. 
Railway traffic, 212. 
Manufacturers, National Associa- 
tion of, 422. 
Marx, Karl, 404. 

Massachusetts and industrial better- 
ment, 31. 
Medium of Exchange, definition of, 

122-123. 
Mill, J. S., 9-12, 28-29, 149-150, 

153-154, 267. 
Money, 

Functions of, 122-123. 
Kinds of American, 195-126. 
Commodity, 124. 
System, 125. 
Mono])oly, 

Accnnii>anies progress, 381. 
Consumers' safeguards against, 

387. 
Fund, 382. 
Kinds of, 299-302. 
Limitations on power of, 386. 



INDEX 



469 



Monopoly — {Continued) . 

Nature of, 379-380. 

Power of substitution, 389. 

Social welfare, 393. 

Standard Oil Company, 390. 
Moravians, 11. 
Mortgages, 272. 

N 

National Banking Law, 142, 147. 
National banks, 142. 

Reserves of, 144. 
Natural resources, source of profits, 

291. 
Nature, 

As agent of production, 17-18. 

Latent powers of, 22. 



O 



Organizer, 193-196. 
Ostracism, 242-244. ^ 

Outerbridge, A. E., Jr., 33-34, 96, 

217, 223-225. 
Over-production, 365. 
Owen, Robert, 11. 



Pace maker, 200. 

Panama Canal Company, 136. 

Paper certificates, 126-127. 

Civil War issues, 132. 
Pareto, M. V., 165. 
Partners, 

Kinds of, 184. 

Limitations on authority, 186. 

Obligations of, 185-186. 
Partnerships, 183-187. 
Pennsylvania Railroad, 189. 
Phila. and Reading Coal and Iron 

Co., 190-191, 201, 254, 269. 
Physiocrats, 18. 
Picketing, 241. 
Piece work, 199-200, 220-221. 
Pittsburgh, wages in, 414. 
Place utility, 14-16. 
Pool, 356-357. 



Possession utility, 16-17. 
Premium system, 222-224. 
Price level, 156. 

Effects of change in, 158-159. 
Prices, 

As exchange relations, 165. 

Discrimination in, 367-369. 

Factors which influence, 159-162. 

Government regulation of, 385- 
386. 
Production, 

Changes required by, 21-22. 

Contributions of nature to, 25-27. 

Place of mind in, 43. 

Primary elements in, 63. 

Service of capital in, 65-67. 

Union of three factors of, 182. 
Production of wealth, 14-15. 

Agents of, 17. 

Forms of, 14. 
Profits, 154, 286-290. 

Source of profits, 290-302. 
Profit sharing, 218-220. 
Property, 2. 

Effects on individuals of, 7. 

Right of, 4-7, 9-10. 
Protection, 

Theory of, 335-336. 
Protective tariff. 

Definition, 334. 

Operation of, 334-335, 



R 



Railroad, 

Forms of monopoly, 321-322, 

Quasi-public in nature, 322-323. 
Railroad legislation, 325. 
Railroad problem, 320-331. 
Railway president, qualifications 

for, 212-214. 
Rapp, 11. 

Real estate loans, 275. 
Rent, 

Agricultural, 257-262. 

Building, 265-266. 

Definition of, 254. 

Economic, 266-268= 



470 



INDEX 



Rent — {Continued) . 

Forms of payment, 2o5. 
Ground, 262-265. 
Ricardo, David, 267-268. 



Saving, 

Definition of, 71. 

Forms of, 72. 

Illustrations of, 71-72. 
Scab, 242-243. 
School of Commerce, New York 

University, 46. 
Seager, H. R., 33-37, 68-69, 299, 

315-317, 329-331, 336. 
Securities, corporation, 387. 
Sherman Anti-Trust Law, 363, 374. 

Failure of, 375-377. 
Short time loans, 274. 
Single tax. 

Economic objection to, 313. 

Fiscal objections to, 312-313. 

Proposition of, 311-312. 

Socialistic features, 400. 
Smith, Adam, 18, 83-84, 85-88. 
Socialism, 9, 395-412. 

Growth of, 395. 

Program, 398-400. 

Weakness of, 407. 

Social surplus, 381-382. 

Ai)i)orti()ned by law, 384. 
Spargo, John, 405. 
Specialization, 88-89. 

Advantages of, 91-93. 

Evil effects of, 94. 

Influence on location of industry, 
104. 
Speculation, 296-298. 
Spencer, Herbert, 404. 
Standard Oil Company, 349. 
Stevens Institute, 42. 
Stock nianii)ulation, 372-374. 
Strikes, 240-245, 218. 

Com])ulsory arl)itration, 425. 

Picketing in strikes, 241, 
Sweating evil, 405. 
Sweat shop, 230, 



Tariff problem, 

Need of reciprocity, 346-347. 

Possible solutions, 347-348. 
Taxation, 

Advantages of direct and indirect, 
306-307. 

Basis of, 305. 

Forms of, 306. 

Ideal system of, 318-319. 

Maxims of, 305-306. 

Right of, 6. 
Taxes, 

Customs of, 317-318. 

Excise, 317. 

General property tax, 307-308. 

Income, 309-310. 

Inheritance, 314-316. 
Time utility, 16. 
Trade a^ements, 236-239, 423. 
Trade unions, see Labor. 

Aims of, 414. 

Characteristics of, 249-252. 

Definition of, 232. 

Efforts to restrict, 420. 

Injunctions, 420. 

Kinds of, 232-234. 
Training, 

Importance of technical, 40. 

Importance in business of, 43. 

Money value of, 41. 

Of shop superintendents, 49. ■ 
Transportation, 320-321. 
Trust legislation, 374. 
Trust movement. 

Beginning of, 349-350. 

In relation to promoter, 353-356. 

In relation to prosperity, 353-353. 
Trust problem, 349-378. 
Trusts, 

Economics of, 365. 

Evolution of, 356-360. 

Gains to producer, 387. 

Organization of holding company, 
360-364. 



INDEX 



471 



Popular hostility based on, 370- 

371. 
Unfair advantages, 366-370. 



U 



Unit of value, 125. 
United Mine Workers of America, 
234, 250. 

National Convention of, 235-236. 
United Shoe Machinery Co., 112. 
United States Census Bureau, 64. 
United States Steel Corporation, 

255, 297, 342. 
United Typothetae of America, 249. 
Utility, 

Classes of, 14-17. 

Marginal, 150. 
Usefulness, 13. 

What constitutes economic, 79-80. 



Value, 149-152. 

Expressed in money, 152-153. 
Vauclain, S. M., 47. 



W 



Wage payment, based on efficiency, 
215. 
Systems calculated to increase ef- 
ficiency, 218-224. 
Wages, 
Distinction between real and 

money, 203. 
How determined, 205-206. 
Paid to women, 230-231. 
Pittsburgh, 414'. 
Walker, Francis A., 9. 
War, expense of, see Production, 

forms of. 
Warne, Frank J., 233-336, 240-244, 

248, 415. 
Wealth, 

Definition of, 1-2. 
Aggregate in U. S., 64-65. 
Welfare work, 30. 
Wells, H. G., 400, 406, 407. 
White List, Consumers' League, 419. 
Women, 

In industry, 56-60, 405. 
Problem of women in industry, 

60-62. 
Rate of wages, 405. 
Wood, S. T., 227-228. 
Wool, National Association of Man- 
ufacturers, 391. 



JUN 11 1913 



H 13 84 ^«l 












<^> O « « 



"^ 



'^o^ 

.^^ 



<r^ -> 




'bV 









«<^ , o « a . T<Ji^ 



0^ **,^,/7;^^. ^ 4^ • 







wRBP' N. MANCHESTER, " aV «^ 






